The Internal Revenue Service (IRS) has called on taxpayers to review their withholding status. Although the agency encourages all taxpayers to conduct a “paycheck checkup,” it states those who were surprised with a tax bill for their 2018 tax filings likely have the most to gain.
Why conduct a paycheck checkup?
A paycheck checkup involves a review of your paycheck withholding to see if you are meeting your tax obligations. In addition to those who found themselves with an unexpected tax bill last year, the IRS recommends taxpayers with two-income families, seasonal jobs, dependents over the age of 17, those who claim the child tax credit and those with high incomes or complicated tax returns to complete a paycheck checkup.
The process involves a review of the taxpayer’s withholding status. If the taxpayer is not withholding enough, they could face a tax bill when filing federal returns next year. If the taxpayer has not paid off a certain percentage of their tax bill throughout the year, the taxpayer could also face additional penalties.
The taxpayer can then make changes to their withholding as needed. Since it is still relatively early into the current tax year, changes made now could mitigate the risk of any surprise tax bill next April.
Why did some taxpayers end up paying more?
The Tax Cuts and Jobs Act (TCJA) may have reduced a taxpayer’s effective tax rate, but it also led to a change in withholding status. In some cases, employers changed the amount withheld from workers’ paychecks. This led to an increased paycheck, but less withheld to meet tax obligations and a surprise tax bill.
As noted above, taxpayers can avoid these surprise bills by completing a paycheck checkup and making any changes as needed. Those who find themselves facing a questionable or unmanageable tax bill have options. An attorney experienced in federal tax law issues can help.