Call your accountant and bring out last year’s tax return: The Internal Revenue Service has released a draft of its new tax withholding form.
The new Form W-4 is expected to be in use for 2020, and is currently open for comments from the public. Employees use this form to fine-tune the amount of tax that’s withheld from their paychecks.
The new form reflects changes from the Tax Cuts and Jobs Act. The new law, which went into effect in 2018, nearly doubled the standard deduction, eliminated personal exemptions and put limits on certain itemized deductions.
Last year, the Treasury Department and the IRS updated the withholding tables to incorporate these changes.
You’ll likely need to dust off a prior return to fill out the new form.
"If you want to get the withholding right, it will work like the tax return itself," said Pete Isberg, head of government relations at payroll company ADP.
"There will be input areas that look more like a 1040 summary than the old Form W-4."
The current W-4 requests taxpayers to note the total amount of allowances they’re claiming — more allowances leads to less tax withheld — and any additional amount they want to have taken from each paycheck.
However, the new form looks for greater specificity. See below for a draft of the document.
This time, the IRS wants you to account for multiple jobs within your household, including whether you held more than one position or you and your spouse work and file jointly.
An additional section calls for taxpayers to claim their dependents, and to factor in the $2,000 child tax credit for each kid under 17 or the $500 credit for other qualifying dependents.
Taxpayers can also spell out the details of "other income" that didn’t have taxes withheld upfront, including interest, dividends and retirement income.
Finally, you can list the number of deductions you expect to claim if you think you’ll be itemizing. This way, you can reduce your withholding and take more money home.
A balancing act
In general, tax withholding is a balancing act for filers.
If you withhold far too much, you get a large refund the following year. But you’ve also given the government an interest-free loan.
Withhold too little, and you take home more cash in your paycheck, but you may owe the IRS next spring.
This year marked the first time filers submitted returns under the new tax law, and some wound up with smaller-than-expected refunds. Others owed the tax man.
"They got more money in their pockets during the year, and they received smaller refunds," said David Desmarais, CPA and member of the American Institute of CPAs’ personal financial planning executive committee.
In all, the IRS issued 101.6 million refunds as of May 10, down about 1% from last year. The average refund check was $2,729, down from $2,778 last year, according to the IRS.
2019 tax prep
We’re coming up on the halfway mark of 2019, so if you were unhappy with your 2018 return, you’re running out of time to avoid a similar outcome next year.
The IRS is reminding taxpayers to take a closer look at their withholding and ensure they’re paying sufficient taxes for 2019.
"Two-income families and people with multiple jobs may be more vulnerable to being underwithheld or overwithheld following these major law changes," the agency said in a statement.
Work with your CPA or hash out the details on the online IRS withholding calculator to figure out how much federal income tax to deduct from your pay.
Here are a few types of taxpayers who should pay close attention to their withholding:
• W-2 employees with side gigs: Got a side gig or a summer job in addition to your 9-to-5? Odds are you aren’t withholding enough to cover both streams of income.
• Former itemizers: Under the old tax law, people who itemized may have withheld less tax from their pay.
However, fewer people are expected to itemize under the new law, so they should review their W-4s. That’s because the standard deduction has been nearly doubled to $12,000 for singles and $24,000 for married couples who file jointly (2018)
• Families with dependents: Previously, it may have made sense for families to have less tax withheld from their pay if they had dependents.
However, the law has done away with personal and dependent exemptions. It also broadened the applicability of the child tax credit to include higher-income households.
If you haven’t already made these updates to your withholding and you owed taxes in 2018, review your W-4 now.
This story first appeared on CNBC.com. More from CNBC:
- To get a bigger paycheck after college, start working now
- Tucked away in this retirement bill is a provision to ease college students’ tax burdens
- Do these 5 things first if you win $444 million Mega Millions or $350 million Powerball jackpot