Financial Planning

A Handy Suggestion for 2018 on Delayed Tax Day

Check your W-4. Tax reform could mean you need to take a different approach.

Thanks to IRS glitches, today is tax day! Which makes today the last day for you to discover that you either gave the IRS a free loan, have to fork over a hefty check or nailed your withholdings and broke even. If you are in that last camp, congratulations! And don’t get too comfy, because with the recent tax changes taking effect for the 2018 tax year, your withholdings may be out of whack if you haven’t checked and updated your W-4. We reckon every income tax-paying American would benefit from grabbing their 2017 returns and a couple recent paystubs, heading to the IRS’s website and using the IRS’s Withholding Calculator to get their W-4s in order. Presuming the website works, that is.[i]

If it has been some time since you filled out a W-4, you might think, “well, my dependents and marital status haven’t changed, and I don’t take any credits, so what is there for me to update?” The answer: A lot. W-4s also consider your estimated itemized deductions and other factors, which got a radical makeover in December. Several itemized deductions got the axe, including interest on home equity loans and job-related moving expenses (except for active military). Others, like mortgage interest, property taxes and state and local taxes, got big haircuts. At the same time, the standard deduction was doubled, so itemizing might not make sense anymore for some folks. Considering these changes now—and how they apply to you—can save you a big headache when you tackle your 2018 taxes. Having a good idea today of whether you will itemize deductions next year, and tweaking your withholdings accordingly, can (potentially) spare your wallet. Deductions aren’t the only big changes. The Alternative Minimum Tax threshold got a big bump, while the personal exemption bit the dust. And of course, for many earners, income tax rates fell. Revisiting your W-4 can help you through all of these.

Happily, thanks to the IRS Withholding Calculator, going through your W-4 is a cinch. You will simply need your completed 2017 tax return, a recent paystub or two and a general sense of how much you will spend on medical expenses and interest or give to charity this year. You might also need a good cup of tea or cold beverage. When you are ready, start the simple four-step process. It begins with the basics: your filing status—single, married filing jointly, etc.—and whether anyone else can claim you as a dependent. The next screen is where you will enter your employment status and specify whether you received a scholarship or contributed to a tax-deferred retirement plan (e.g., a 401(k), 403(b) or 457 plan). Don’t include any potential IRA contributions—those come later. This screen will also ask if you contributed to a “cafeteria or other pre-tax plan,” which has nothing to do with your lunchbreak—rather, it refers to pre-tax health care benefits like Health Savings Accounts and Flexible Spending Accounts. This screen also asks about credits, including the Earned Income, Child, and Child and Dependent Care Credits. If you pay for child care or the care of someone who is mentally or physically incapacitated, you may qualify for the latter.

Screen three walks you through income and withholdings. Use your paystubs to calculate expected salary, 401(k) contributions and federal income tax withheld—and for that last one, enter only federal income tax, not Social Security, Medicare or state withholdings. If you have self-employment income, that goes on this screen under “other taxable earned income,” along with unemployment compensation, dividends and interest, which you can estimate. And if you plan to make an IRA contribution or are paying student loan interest, those go in the final line item. The last screen is the fun one: deductions! Enter your planned deductible expenses and charitable contributions. Leave the box unchecked so that the IRS calculator can figure out whether itemizing or taking the standard deduction makes more sense. Then hit “continue,” and voilà! You’ll get a printout showing how close to—or wide of—the mark you are. It will show your estimated full-year withholding and how it compares to your estimated full-year tax obligation—better known as your estimated refund or last-minute payment. Then it will tell you how to adjust your W-4 to better align your withholdings and tax obligation. All you will have left to do is fill out a new W-4 form. (Though, as always, check with your tax planner to verify whether any withholding adjustments or other changes make sense for your situation.)

Technically, you can do this at any time throughout the year. But in our view, the sooner, the better. If you have to make adjustments, it is generally easier when you have more pay periods to work with. If you find you aren’t withholding enough, it is a lot less painful to start catching up early in the year, rather than adding several thousand to your annual withholdings in November or December. If you are withholding too much, which is quite possible this year given the tax cut, then you can start getting higher take-home pay now. What isn’t to like about that? It could give you leeway to boost retirement account contributions or, in the standard parlance of personal finance writers, Save More!



[i] Insert teehee or smile emoji here.


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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.