After completing the annual task of filing tax returns, most of us like to put the ordeal behind us until the next one rolls around. But do yourself a favor and complete one more step: Review your withholding.
"Once the return is prepared, it is a perfect time to look forward to 2019 tax returns and avoid having a large tax due next year by increasing your withholding or avoid loaning the government money interest free until you file next year by decreasing your withholdings," said Michael Law, a CPA for Canopy.
And just a quick note -- you may be getting a smaller tax refund this year. Here's why.
How to Review Your Withholding
According to a December 2018 H&R Block survey, only 19 percent of respondents had updated their paycheck withholding after the Tax Cut and Jobs Act of 2017 took effect. Another 40 percent of respondents said they updated their W-2 after tax reform, which cannot be done.
Updating withholdings is done via a W-4 form. As a refresher, the form requires providing much of the same information you put on a tax return, such as filing status, income, itemized deductions and eligibility for child- and dependent-related tax credits. All of this information helps determine the number of allowances you should claim and how much tax is withheld.
"If you need to check or change your current withholdings to ensure a refund for the next tax year, contact your organization's human resources office or your company's payroll department to confirm your current withholding or to obtain a new W-4 form," said Daniel Hill, CFP and president of D.R. Hill Wealth Strategies.
You can also update this information directly with the IRS, Hill said.
Check your withholding again later in the year.
Not only should you review your withholding immediately after completing a tax return, it's also a good idea to revisit it several months down the road, advises John Little, an accounting professor at the Samuel Curtis Johnson Graduate School of Management at Cornell University.
"Check it early in the year to be sure it makes sense. Check it later in the year to be sure all is accumulating properly, compared to the prior year," said Little, who suggests looking at your pay stub (either paper or electronic), which indicates the amount of taxes paid year to date.
In addition, if something changes in your financial world, like you received a raise, got married or had a baby, check it again, said Little. (Hoping to see a bump in pay this year? Here are some tips on how to ask for a raise.)
Not sure how much to withhold? Get some help.
All of the major tax preparation software includes a feature that can estimate your future year tax burden. Get in the habit of using it, said Little.
The IRS also has a tax withholding calculator that can assist with this task.
"Based on the information that the taxpayer inputs, the calculator makes an estimate as to income tax liability and the number of exemptions that should be included on the IRS Form W-4," explained Jean Wells, a CPA and associate professor and interim chair of accounting at Howard University.
If you're someone who just doesn't like going it alone, consider working with a tax preparation professional, as they have an even more robust approach to developing estimates of your tax liability for the coming year.
Get a tax refund this year? Don't spend it on things you can actually get for free -- like these 50 spring freebies.