Personal Finance

On the IRS naughty list: You failed to withhold enough pay for taxes in 2018

Key Points
  • The 2018 tax overhaul limited certain itemized deductions and reduced individual income tax rates overall.
  • If you didn’t revisit your tax withholding to reflect these changes, you could owe the IRS when you file your 2018 return next April.
  • 1 in 5 people polled by H&R Block said they adjusted their Form W-4, a key document used to determine your income tax withholding.
The Internal Revenue Services offices in Washington, D.C.
Adam Jeffery | CNBC

At this point, if you haven't adjusted your tax withholding at work, you should prepare yourself to owe the IRS or get a smaller refund in 2019.

Though Uncle Sam has repeatedly warned filers with high incomes and dependents, as well as retirees, to ensure that they are withholding sufficient income tax in 2018 in light of the new tax law, many people may not be making the appropriate adjustments.

About 1 in 5 participants surveyed by H&R Block said that they updated their Form W-4 — a document that helps you figure out how much income tax you should withhold from your pay — in response to the tax overhaul.

The form itself can confuse people as they complete it.
Nathan Rigney
lead tax analyst at H&R Block

The tax prep service polled 2,002 individuals online in November.

Three out of 10 participants said they would feel unprepared if they had to adjust their W-4 on their own.

If you haven't tweaked your withholding yet, it's probably too late to head off that tax bill next spring.

"Adjusting it this late in the year won't have much impact on your 2018 withholding," said Nathan Rigney, lead tax analyst at H&R Block.

"It won't correct the error that's existed this entire year," he said.

However, if you make the appropriate updates now, you should be set for the 2019. Here's what to know.

Tax overhaul

This year, the Tax Cuts and Jobs Act revamped the tax code, roughly doubling the standard deduction, tossing personal exemptions and placing sharp limits on itemized deductions.

Individual tax rates have also been changed. See below for next year's brackets.

As a result, the IRS and Treasury updated the tax withholding tables, guidelines employers use along with Form W-4 to determine how much income tax workers should withhold from each paycheck.

Uncle Sam kicked off an outreach effort to remind taxpayers to check their withholding in 2018 in response to all of the changes.

Nevertheless, the Government Accountability Office estimates that about 2 in 10 taxpayers will owe the IRS in 2019. That's equal to about 30 million people.

Most affected

MartinPrescott | E+ | Getty Images

These people should pay especially close attention to their withholding:

Filers who itemize: Prior to the new tax law, it may have made sense to withhold less from your pay if you itemized deductions.

That may no longer be the case now that the standard deduction has nearly doubled to $12,000 for singles and $24,000 for married couples filing jointly. Those who itemized in the past may no longer do so going forward, so they may need to revisit their withholding.

Households with dependents: Under the old law, it may have made sense to withhold less in taxes if you had dependents.

Now, personal and dependent exemptions are out, so these filers should review their paystubs to ensure that they're not underwithheld.

Retirees: Just because you're no longer working, doesn't mean that you still won't owe. You can use Form W-4V to withhold a flat rate from your Social Security check or Form W-4P to withhold from your pension.

Do it right

As important as the W-4 may be, filers may still find it confusing to navigate.

Three out of 10 participants in the H&R Block survey said that if they wanted to get a larger refund, then they should decrease their withholding. A similar proportion of participants said that they should raise their withholding if they wanted a larger paycheck.

Both of these statements are false.

If you have more taxes withheld from your paycheck, your take-home pay will be reduced. However, you may end up with a refund in the following year because you're over-withheld.

"The form itself can confuse people as they complete it," said Rigney.

You can try to pinpoint your ideal withholding amount by using the IRS calculator, or by contacting your CPA or tax preparer to make sure that you correctly account for the line items in your paycheck.

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