December's tax cut means millions of Americans will owe less money when they file their 2018 tax returns. Indeed, the new law is expected to give a typical middle earner a tax cut of nearly $1,000 for 2018, according to the Tax Policy Center.
But the due date for those 2018 returns, in April 2019, is pretty far off -- and until now, there was no good way for you to predict exactly what you will owe, and whether too much or too little is being diverted from your regular paycheck to cover that.
That just changed. The IRS has now published a new version of its online withholding calculator, incorporating the tax rule changes from the Tax Cuts and Jobs Act.
Should You Change Your 2018 Withholding?
The IRS had already instructed employers to adjust workers' 2018 federal withholding amounts by Feb. 15, based on the employer's own estimates of what workers will owe under the new rules. As a result, you may have already seen a bump in your paycheck in the past few weeks.
Still, the new calculator will help you make sure your employer is getting it right. And that's important because if your company makes a mistake, you could pay a steep price.
If your employer isn't taking enough out, Uncle Sam will hang on to the extra money until you claim it next April -- without paying you the interest you could be earning elsewhere.
And if your employer is taking out too little, you can have problems too. About 7% of middle earners will actually end up with a tax increase next year, according the Tax Policy Center. Those taxpayers could find themselves caught short when it comes time to file next April, and could even end up owing a penalty if they accidentally underpay and never realize they owe more.
Your employer's estimate of the tax you owe is based on IRS form W-4, a form you should have filled out when you were hired and which your employer should be keeping on file. Any number of life changes can alter your tax status, making your W-4 out of date. Among the biggest: getting married, having kids or buying a home. Even smaller events, like starting (or seriously ramping up) contributions to a 401(k) or IRA, could also change what you owe.
With the average tax refund amounting to more than $2,900, according to IRS data, fine tuning your withholding could boost your paycheck by $200 or more a month.
How to Use the IRS Calculator
The updated IRS calculator is detailed enough to give you a specific, useful answer -- but that means you'll need to prepare in order to use it.
Before you get started, gather your (and your spouse's, if applicable) latest pay stubs. Your most recently completed tax return may help too. And if you have other sources of income, or if you plan to itemize your deductions, you will also need documents relevant to these.
The good news is that if your situation is relatively simple, the calculator should only take 10 to 15 minutes to complete -- provided you have the relevant information at hand. When you are finished, it will give you specific instructions on how fill out a new Form W-4.
Deliver this to your employer's human resources department and your paycheck should be adjusted accordingly.