The good news is it’s early, so there’s plenty of time to set yourself up for a better outcome next year.
One thing hasn’t changed with the new law: even if you’re unable to pay what you owe in full, you still have to file a return or an extension by April 15 or face a penalty.
If you're not able to pay the tax you owe by April 15, the balance is subject to interest and a monthly late payment penalty. In past years, those who could pay 90 percent of their tax bill on time had the penalty waived, and this year the IRS has reduced that to 85 percent.
How did it go for American taxpayers in 2018?
There was no shortage of confusion, and even frustration, about the tax law change that went into effect for 2018. Here’s an overview of how American’s fared:
For more statistics and analysis, check out part one and part two of Nerd Wallet’s and The Harris Poll’s taxpayer surveys.
Why your withholding matters
When you start a new job or have a change to your financial life, you must complete federal form W-4. Allowances you claim on this form tell your employer how much tax to withhold from each paycheck. The withheld money pays the majority of your annual tax bill. You can estimate the amount of taxes you’ll owe, then use that figure to determine how much to have withheld. The idea is to set aside a small amount of each paycheck toward your taxes rather than paying one large bill all at once.
If you have more withheld from each check, you’ll take home less money, but lower or eliminate your tax bill over the course of the year. On the other hand, if you don’t withhold enough, your paycheck will be bigger but you might end up owing.
For a simple refresher how withholding works and the differences between withholding allowances and the now-abolished personal exemption, see our blog here.
Plan ahead and watch for more changes
If you haven’t already, review your withholding! Check the allowances noted on your W-4, then use the IRS’s online withholding calculator to see if you need to make adjustments. If you owed taxes this year, you might need to reduce your number of allowances or even have additional funds withheld. Doing it early means you’ll be able to put more money toward your taxes now, so there’s less chance you’ll need to make it up at the end of the tax year.
According to the IRS, “the Withholding Calculator does not ask you to provide sensitive personally-identifiable information like your name, Social Security number, address or bank account numbers. The IRS does not save or record the information you enter on the Calculator.”
If you make adjustments to your withholding, remember that you may also need to update any estimated tax payments you make on income that’s not subject to withholding. This includes income from investments, social security, and some business income. Forbes explains this and other tax strategies here.
Is that a wrap for tax season? Not quite. The IRS has plans to update the W-4 form, says USA Today, with the goal of minimizing the number of people who owe or who receive a refund. A first draft is expected to be released by the end of May, followed by a public comment period. The new form will go into effect sometime in 2020. Employees may be required to provide more details about their income, deductions, and filing status than in the past. We’ll keep you informed about this change as information becomes available.
You can’t avoid taxes, but there are ways to plan ahead and be ready for the changes. At Horizon one of our biggest goals is to help you stay informed and prepared on matters that affect you and your employees, from benefits, to HR news, to taxes. Please contact us today!