Now that April 15th has come and gone and some of the pain has passed, I can use my suffering to help you, dear friend, avoid a big tax bill next year. We owed a lot more than we usually did. As expected, we went through the five stages of grief:
1. Denial – We can’t possible owe this much. Run the numbers again!
2. Anger – Me: I told you to check your withholding! Hubby: You didn’t tell me that!
3. Bargaining – Me: Do we have to pay it all now?
4. Depression – Us: Why do we owe this much? I need chocolate!
5. Acceptance – It’s the evening of the 15th! Let’s just do it so we don’t get hit with a fine.
I had forgot the cardinal rule of tax planning: always check your withholding. I had learned this trick years ago, but over time I had forgotten how important it was especially with the new tax law changes. So how do you check and change your withholding? Glad you asked:
Step 1: Get the pay stubs
You’ll need a copy of your (and if married and you file jointly, your spouse’s) most recent paystub. If you get paid through automatic deductions log on to your company’s HR system to print a copy. Mourn briefly over the difference between your gross and net income. Then remember Justice Oliver Wendell Holmes, Jr.‘s quote: “Taxes are the price we pay for a civilized society.”
Step 2: Use the IRS’ withholding calculator
Go to www.irs.gov and search for “withholding calculator.” It should be the first link. Scroll down a bit until you see a button that says “Withholding Calculator.” Complete each page of the calculator based on your circumstances, plugging in numbers as needed from your paystub.
Let’s work through an example. Let’s say David and Abby Jones are checking their withholding. They file jointly.
Next they’ll need to enter in their current withholding, if and how many dependents they have and if they have any deductions like student loan interest or…
On the next screen the Joneses will enter the gross income they expect to receive. If they contribute to a non-Roth, tax deferred retirement plan like a 401k, 403b, or 457, they would also enter the annual contribution they plan on making here as well.
This screen is where the pay stubs will come in handy. David and Abby will need to enter how much federal tax has been taken out so far this year and in their last pay check.
The next page is deductions. Unless amount of deductions such as gifts to charity (including tithes) and medical expenses exceed the standard deduction, I suggest skipping this section and press Continue.
And that’s it. The next page are the results. Based on my completely fake numbers, the Joneses will own Uncle Sam about $2,800 … unless they change their withholding. The IRS will suggest the edits you’ll need to make to your W4 to ensure that you won’t owe come next April 15th.
Step 3: Update your W4
Now, you probably haven’t seen this form since you started your job, but it’s important to use the information from the Withholding Calculator to update your W4 as soon as possible so that the changes are made in your paycheck as soon as possible. For many companies you can do this electronically however if you need to submit a paper copy, here is it. Both David and Abby would change their withholding to 0 on Line 5. On line 6 David will request an additional $43 to be withheld from his paycheck; Abby will request an extra $37.
Now, what to do with your refund? How about putting it in an sinking fund?
What about you? Do you regularly check and update your withholding? Leave a comment below.