80 percent of people missed a step related to taxes in 2018, and it could affect their refund
The new GOP tax bill, which was passed in December 2017, made some sweeping changes. Most of those went into effect in the 2018 tax year, for which filing season officially starts on January 28.
The individual tax rates changed, so the IRS updated the income tax withholding tables and encouraged filers to review and update their W-4 forms — which determine how much income tax is withheld from your pay — to make sure you were withholding the right amount under the new legislation.
But a 2018 survey by H&R Block suggests that most Americans never did that: As of November, only about 20 percent of respondents said they had updated their W-4 in response to the tax overhaul. That means about 80 percent didn't.
If you're among those who didn't, you could get a smaller refund than you anticipated. You could even owe money to the IRS.
"Taxpayers who were most affected by tax reform should have made updates to their W-4 in early 2018," Eric Bronnenkant, head of tax at Betterment, tells CNBC Make It. That group includes filers who itemize and households with dependents, for example. "If they did not, they may be in a position currently to owe [the IRS] additional amounts, plus possible interest and penalties."
At this point, adjusting your W-4 now won't have an impact on your 2018 withholding, Bronnenkant says: "An individual can only make changes to a 2019 W-4 currently. There is no opportunity to make any changes for 2018 withholding."
That said, you should update it right away if necessary so you're set for the 2019 tax year.
If you haven't reviewed your W-4, or aren't familiar with the form, you're not alone: More than half of Americans cannot say what a W-4 is, according to a report from NerdWallet.
What is a W-4?
A W-4 is a form you fill out that tells your employer how much to withhold from your paycheck for taxes. You fill it out when you start a new job and can change it as necessary.
The form asks for the number of allowances you want to claim. You get an allowance for having a spouse, for example, or for having kids, or for filing as a head of household. Those allowances affect how much of your paycheck will be set aside for taxes. The more allowances you have, the less tax will be withheld.
If you withhold too little, you may owe the IRS come tax time. That's what may happen to about 20 percent of taxpayers, or about 30 million people, this year, the Government Accountability Office estimates.
On the flip side, if you withhold too much, you could end up with a large refund, which means you've essentially given an interest-free loan to the government.
How often should you review your W-4?
"All taxpayers should review their W-4 election on at least an annual basis," says Bronnenkant. Plus, it's a good idea to revisit it after any major life change, he says, such as having a child, getting married or divorced, or if your spouse dies at any time during the year.
This year, those most affected by the new tax law — again, filers who itemize and households with dependents — will especially want to pay close attention to their withholding.
How do you know if you have to adjust your W-4?
Start by using the IRS withholding calculator, which the agency updated last year to account for the tax changes, says tax attorney and certified financial planner Rebecca Walser. If your situation is complicated, or if you're confused, you may also want to consult with an accountant.
Next, review what your current withholding is.
If the numbers "do not match up, you'll want to request a W-4 and change your withholding so that they are not over-withholding or under-withholding," Walser tells Make It.
You can adjust your W-4 at any time during the year. Again, it's too late to make any changes for 2018 withholding, but you can make changes for the 2019 tax year.
The earlier you take action, the better, as the IRS site makes clear: "Submit the completed Form [W-4] to your employer as soon as possible. Withholding takes place throughout the year, so it's better to take this step as soon as possible."
Correction: This article has been updated to correct that if you withhold too little from your paycheck, you may owe the IRS, and if you withhold too much, you could end up with a large refund.
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