A mid-year tax withholding check-up


Did you know that only about 6% of people have the right amount withheld from their paychecks? It’s what brings all the drama to tax-time: the uncertainty of knowing whether you had enough withheld to cover the tax bill, or if you’re going to owe more. The main reason for this is that the Federal withholding tables do not work for nearly anyone except a single person with one job. Ever try to use the Form W-4? It’s just *broken*. (Honestly, I think the calculations on the W-4 only work for the Government worker who wrote it!)

That’s because the Federal tax law is really complex, with different types of income being taxed at wildly different rates, different marginal tax rates depending on how much you make, and a wide array of tax deductions and credits that may apply to you in some years but not others. Basically, to do a decent job of figuring out how much you’ll owe, you need to do your whole tax return!

This year the withholding tables are even more screwed up than ever. The Government Accounting Office recently advised that 1 in 5 people are going to find out at tax time that they were under-withheld.

Here’s what I suggest you do.

    • First, figure out how much you’re on track to pay to the Feds. Print out a paystub and take a look  at the Federal Year To Date withholding on your paycheck. (Federal income tax withholding is sometimes abbreviated as FIT WH.)
    • Then multiply out how many pay periods are left times the current amount you have withheld each paycheck to get to the total expected to be withheld for this year if you do nothing different.
    • If you know that you have taxes withheld some other way, or have paid quarterlies, or applied a refund from the 2017 tax return to 2018, add those amounts in, too. (So combine the withholding from both spouse’s jobs, for example.) How much are you on track to pay in to the Government for 2018 in advance?

Then stop and think about what your tax bill is *likely* to be. A good guess is to assume it’ll be the same as last year if everything else is the same, even with the change in the tax code. (More about that below.) How to do that?

    • If you are a ProsperiTea Planning retainer client just email me how much withholding you’re likely to have and I’ll do the rest. I’ve got a tax planner all set up for you already.
    • If you are a Tea & Taxes client you can call for one of my tax planning appointments, although it’s probably only worth it if you have other things going on as well. Sometimes we can find ways to save you money with tax planning. Be warned that I only have a half dozen or so of these spots.
    • Or you can check it yourself: get out your 2017 tax return and look to see how much you paid in total tax in 2017. It’ll be line 63, half way down the second page of the Form 1040. How do the numbers compare?

Many of you will find your taxes are lower in 2018 for real, assuming tax credits aren’t going away this year for unrelated reasons. (If you had a kid in college or solar credits or Earned Income Tax Credits going on those can make the numbers vary by thousands of dollars from one year to the next!) In fact, the child tax credit went up for 2018 and was expanded to include other dependents. The standard deduction went up, too. But a lot of itemized deductions have gone away, and personal exemptions are gone now, too. There are a lot of moving parts in this one! There’s a new business deduction, and lower tax *rates* for nearly everyone who pays taxes. Watch for that word “rate”: I’ve been seeing lots of people with higher taxable *income* because of the exemptions going away, but when the lowered tax rates are applied, it tends to work out that their total Federal income tax comes to around the same or slightly less.

But lower tax liability at tax time doesn’t mean you’ll be happy, because even lower taxes will feel sucky if you have to get your checkbook out in April because you didn’t have enough withheld during the year!

So how to fix the withholding when the W-4 form is broken?

  • I suggest you walk into your payroll office and tell them how much to take each paycheck. If you have a good person in payroll they can help you with that. Otherwise, here’s a hack: you can use the Form W-4 and tell them to claim 99 exemptions on line 5 and and withhold an additional amount on Line 6 for what you ACTUALLY want them to withhold each pay period. Or you can see what you’re withholding now and tweak it by adding more on line 6.  (So if your current withholding is $550/pay period and you need to have $650/pay period withheld, keep the exemptions the same on line 5 and put $100 on line 6.
  • A quarterly estimated tax payment might be a good idea if you know you’re going to owe more this year, perhaps because you started being self-employed, or had a big capital gain, or a kid graduated from college and you didn’t adjust your withholding earlier.

Don’t want to sharpen your pencils and check this out? Another option is to build up some savings in case you owe this time, then grit your teeth and expect a wild ride at tax time this year.