Quick Tax Update: Withholdings
With the new tax law, many people are under the impression there will be a positive impact to their returns and most people have been caught off by surprise when they don't see this expectation.
There are a lot of changes that went into effect with exemptions and certain deductions being eliminated and credits being increased, etc…, but one factor I'm seeing having an adverse effect on returns is the withholding.
Withholdings from your paycheck are essentially tax payments made throughout the year.
When completing your return, an overall tax amount is calculated that you owe and then these payments are applied against that. These payments are combined with any credits you are eligible for and if this combined amount is greater than the amount of your tax liability, you get a refund. Conversely, if the amount is lower than the liability, you will have a balance due (owe).
If you made no changes to your W-4 and everything else relatively stayed the same, you would have less taxes withheld in 2018 vs. 2017. This means you have less payments toward your taxes throughout the year.
With less payments being made, either:
Your refund that you are accustomed to is smaller, or
The amount that you owe may increase (since less payments are being made towards it).
So where is the windfall from the tax changes there were so heavily advertised? It came in the form of increased take-home pay.
The tax savings came throughout the year instead of at the end of the year.
Because the tax savings were distributed in small doses, the amount probably wasn't a significant amount enough to notice to take action (save, pay off debt, make a large purchase) vs. a lump sum in the form of an increased refund.
So what should you do? There a a few options:
If you are still receiving a refund and are happy with that amount, you could do nothing (whether getting a refund is good or not will be addressed in another post soon).
If you want to receive a larger refund (that you are accustomed to) OR if you owe and you want to have a lesser balance due, you need to adjust your W-4.
Everyone's tax situation is different and this is intended as a general observation I've seen so far this tax year. If you'd like to discuss further in detail and how this affects you, please don't hesitate to contact us.