The IRS urges high-income taxpayers and those with complex tax returns to complete a “paycheck checkup.” Doing so will help them determine if they are having the correct amount of taxes withheld from their paychecks for the rest of this year. The IRS Withholding Calculator and Publication 505: Tax Withholding and Estimated Tax can assist in completing this checkup.
Why a Checkup is Important
The Tax Cuts and Jobs Act, passed last year, introduced many changes to tax laws. A checkup is especially important for high-income taxpayers and those with complex returns, as they are often more impacted by these changes than those with simpler tax situations.
Key Tax Law Changes That May Affect Taxpayers
Some of the significant tax changes include:
- Changes to tax rates and brackets
- Expansion of the child tax credit
- Standard deduction nearly doubled:
- $24,000 for joint filers
- $12,000 for singles
- $10,000 cap on deductions for state and local property, sales, and income taxes
- New limits on deductions for some mortgage interest and home equity debt
- Higher limits on the percentage of income deductible for charitable contributions
- No deductions for miscellaneous expenses:
- Previously had to exceed 2% of a filer’s income
- Included investment expenses, unreimbursed employee expenses such as travel, meals, entertainment, and uniforms
Considerations for Itemizing vs. Standard Deduction
In the past, high-income taxpayers often benefited more from itemizing deductions. With these changes, it’s important to reassess whether itemizing still makes financial sense or if taking the standard deduction is now more advantageous.
Action to Take
If taxpayers find they need to adjust how much tax is being withheld from their paycheck, taking action now can help prevent an unexpected tax bill or penalties at next year’s tax time. Adjusting withholding as soon as possible ensures an even withholding amount throughout the rest of the year.
Frequently Asked Questions
What is a paycheck checkup and why should I do one?
A paycheck checkup is a review of your tax withholding to ensure the correct amount is being deducted from your paycheck. It’s especially important for high-income earners and those with complex returns to avoid underpayment or unexpected tax bills.
How do I perform a paycheck checkup?
You can use the IRS Withholding Calculator or refer to IRS Publication 505 to evaluate your current withholding and make adjustments if necessary.
What major tax law changes should I be aware of?
Recent changes include altered tax brackets, a nearly doubled standard deduction, a $10,000 cap on state and local tax deductions, and limits on certain itemized deductions like mortgage interest and miscellaneous expenses.
Should I still itemize my deductions?
Due to the increased standard deduction and limits on some itemized deductions, many taxpayers, especially those with high income, may find that taking the standard deduction is now more beneficial.
What happens if I don’t adjust my withholding in time?
Failing to adjust withholding when needed can result in a larger tax bill or even penalties at tax time. Adjusting early helps spread the correct withholding across the rest of the year.