On the heels of a tax season where many taxpayers saw a smaller than expected refund, or owed taxes when a refund was anticipated, the IRS is providing a new tool to help taxpayers manage income tax withholding amounts to better match expectations. The new IRS Tax Withholding Estimator can help taxpayers ensure that there are no surprises with 2019 tax return filings. The emphasis is on “can” though.

The new tool allows taxpayers to input their income, withholding, adjustments, deductions, and credits. It then allows taxpayers to choose whether a refund is desired, or to simply not have a balance due at the end of the year. But the tool is only as good as the information supplied. For instance, it is necessary for taxpayers and spouses (if filing jointly) to have a copy of their most recent pay stub, most recent tax return, and the number of qualifying dependents.

A Detailed Look at How It Works

The steps necessary to complete the Tax Withholding Estimator are nearly as comprehensive as completing a tax return. The taxpayer must supply income and withholding data, hence the need for pay stubs. Then a taxpayer will complete the steps to include any items that reduce income, such as the tuition and fees deduction or the self-employed health insurance deduction. Next, the taxpayer must determine if he or she should take the standard deduction or will itemize deductions. Then the taxpayer can enter the amount of any expected tax credits such as the American Opportunity Credit or the Child and Dependent Care Credit.

From there, the taxpayer chooses whether a refund or a $0 balance due is desired. Unlike the Withholding Calculator of previous years, the Tax Withholding Estimator provides specific directions to complete a new Form W-4, which is used by the taxpayer’s employer(s) to determine withholding amounts. It even allows taxpayers to print a new blank Form W-4 that the taxpayer can provide to his or her employer.

In this regard, the Withholding Estimator provides more useful guidance than the previous Withholding Calculator, but as noted, this convenience comes with added effort to obtain all of the necessary data. The guidance to better assist taxpayers with Form W-4 preparation comes in response to the surprises many experienced this past year. Confusion over the appropriate number of “personal allowances” on Form W-4 is believed to be responsible for many of these surprises.

A Word to the Wise

A word of caution is also in order. Taxpayers who increase withholding amounts this late in the year should make sure to check it again in January, or they may end up overwithholding when it comes to their 2020 taxes. For more information about the new Withholding Estimator, please contact your local CBIZ tax professional.

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Published on August 13, 2019