We all want to be like Goldilocks when we pay our income taxes – we want to get it “Just Right”. Not too hot (paying too much) or too cold (paying too little). How do you get it “Just Right” the Bear Family – eh — the IRS? Interest on underpaid taxes can be almost as scary as an angry Papa Bear!
Figuring out if your tax withholding is too high or too low is easier than you think. The IRS published a Withholding Calculator for employers in January 2018, found hereIt reflects the new tax law passed in December 2017. Using this tool and making any indicated adjustments can help to avoid a serious too-hot or too-cold situation when you file your taxes next year.
The Withholding Calculator says to gather your pay information and last year’s tax return to get started. Actually, there’s more you need to know to get the most accurate and helpful results. Follow these three tips to get your Tax Withholdings “Just Right”:
1. Understand Terms — Get clarification for any unfamiliar terms used in the Withholding Calculator so you answer the questions accurately. Terms like “pre-tax retirement plan,” “qualifying person,” and “taxable earned income” could mean something different than what you think. The IRS defines its terminology, but it’s not always super clear to everyone. Good news – a quick Internet search will provide links to sites where terms are explained in plain and simple language.
2. Identify Changes — Compare your life and work situation from last year to your circumstances now. If you’ve changed your marital status, purchased or sold a home, or added an employer-provided benefit, your answers for this year will be different than they were for last year. Be sure you know how to answer each question based on your life and work circumstances now. If anything else changes, you will want to go through the Withholding Calculator again later in the year.
3. Know Your Pay Frequency – Entering the wrong pay frequency, i.e., how often you get paid, really throws off the Withholding Calculator. One small difference, such as being paid bi-weekly (every other week, or 26 times a year) instead of semi-monthly (twice a month, or 24 times a year) could mean owing more money when you file your return next year. Miscalculating by two pay periods could make a significant difference.
Make sure your tax withholding is “just right” with the IRS Withholding Calculator and avoid a too-hot or too-cold situation when you file your taxes next year. Otherwise, you could be staring an angry Papa Bear in the eye next April 15!