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Why that IRS calculator might not be enough to pinpoint your 2019 tax liability
CNBC
Sat, 20 Apr 2019 16:30

Why that IRS calculator might not be enough to pinpoint your 2019 tax liability

CNBC
Sat, 20 Apr 2019 16:30

Hoping to avoid a tax surprise for 2019? Talk to your accountant before you use the IRS tax withholding calculator.

Why that IRS calculator might not be enough to pinpoint your 2019 tax liability


Thats because user error and failure to consider state and local taxes could result in incorrect adjustments to the income taxes you have withheld at work.

The 2018 tax year brought in a host of changes for filers as they submitted returns under the new Tax Cuts and Jobs Act.
The new legislation roughly doubled the standard deduction, did away with personal exemptions and trimmed individual income tax rates.

Further, the Treasury Department and the IRS also updated the withholding tables that employers use to help deduct the appropriate amount of income tax from workers paychecks.

The IRS is hammering out a new Form W-4, which you can use to tailor your income taxes. Itll be available in time for 2020. The W-4 youre using for 2019 will be similar to last years.
Some filers grappled with smaller refunds and taxes owed, at least partly because they didnt adjust their withholding for 2018.

"The best time to figure out your W-4 is right after you prepare your taxes," said Nathan Rigney, lead tax research analyst at the Tax Institute at H&R Block.

"You need to keep in mind that were already in April, so you have some catching up to do," he said.

Theres the catch: Using the IRS withholding calculator alone might not be enough to pinpoint the right amount you should withhold.

"A lot of people dont understand the line items and you have to make sure youre accounting for that accurately," said certified financial planner Debbie J. Freeman, a CPA and director of financial planning at Peak Financial Advisors in Denver.

"Unless you understand taxes, its not something you should fully rely on," she said.
How much income tax your payroll company pulls from your paycheck depends on the number of allowances you claim on Form W-4.

The more allowances you take — you can claim them if you have dependents or if you itemize deductions on your taxes — then the less tax you will have withheld from your pay.

If you withhold too much tax, youll get a large refund from Uncle Sam next spring, but youve basically given the government an interest-free loan.
If you withhold too little, youll end up on the hook for taxes owed.

"If you can take a stab at it, its worthwhile to use the calculator, but I worry that people will fill it out wrong, fail to withhold enough and have a surprise next year," said Chris Benson, a CPA and principal at L.K. Benson & Co. in Towson, Maryland.
The biggest catch with the withholding calculator is that it doesnt tell you how to adjust for state and local taxes.

After crunching the numbers for a New Jersey-based married couple that files jointly and with one dependent, the IRS calculator suggested that the higher-earning spouse claim zero allowances and the lower-earning spouse claim six.

However, that result doesnt consider the Garden States individual income tax rate, which is as high as 10.75%.

"The W-4 is supposed to change your federal withholding, but often employers give you the same allowances on the federal and state side," Freeman said.

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Taking six allowances for both federal and state likely would have resulted in the couple owing New Jersey the following April, she said.

Instead, the lower-earning spouse could take three allowances on the federal return and three on the state, Freeman said.

Contact your employers payroll department to let them know how you would like to deduct for state taxes.
User error and unfamiliarity with the appropriate deductions and credits may also result in questionable calculator results.

Though you can plug in your data for the child and dependent care credit, the child tax credit and more, you have to be aware as to whether you qualify for those breaks.

People who itemize their deductions may take more allowances, thus reducing the amount of taxes pulled from their paychecks.

Further, if you have side gig income in addition to your W-2 income at work, youll need to revisit your withholding and ensure youre paying enough taxes.

It doesnt hurt to review your W-4 with your tax preparer and discuss potential changes, especially now that youve filed for 2018.

"The struggle with more precise withholding is that its garbage in, garbage out," said H&R Blocks Rigney. "You need accurate inputs. It wont be as simple as writing a number of allowances and calling it good."

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