July 2018 Newsletter to ClientsSubmitted by Moneywatch Advisors on July 11th, 2018
Enjoy this month’s edition that features a helpful tool and reminder from Steve for checking tax withholdings.
With New Tax Law It May Pay to Check Withholdings - I recently completed the IRS On-line Calculator and was surprised to find we are scheduled to owe tax in April because we are under-withholding. With the federal tax law changes, many middle-Americans will see their taxes decrease this year. When the IRS directed employers to change withholdings to the new tax brackets, however, many of us saw a bump in our paychecks in February. As a result, you may be under-withholding and would benefit from taking 15 minutes to check. Don’t worry, it’s surprisingly easy.
First, here is why you should care. Our withholdings are determined by several factors such as how many people you can claim as dependents and in which tax bracket you fall. It is important to try and get this right and your goal should be to get your annual withholdings to match the annual tax you will owe as closely as possible. Under-withholding is bad because owing too much tax at the end of the year can generate a penalty by the IRS. And over-withholding is bad because you are letting the IRS use Your Money all year, interest-free. Now, admittedly it feels good to get that check in April but, if you like that refund, take that extra money you’re giving to Uncle Sam now and put it in an account each month dedicated to something fun. Then, earn a little interest to make it even better.
If you’re like most people you may get a W-4 and WD-40 mixed up. A W-4 is the document you fill out your first day of work and then never, ever see again. It ultimately determines how much federal tax is taken out of your paycheck each pay period. WD-40, on the other hand, is a handy, household lubricant. By the way, did you know you can use WD-40 to clean guitar strings or to clean off lipstick stains?
The IRS On-Line Calculator will tell you exactly how to complete your W-4 so your withholdings will match your annual tax owed.
What you will need
While completing the Calculator only takes about 10 minutes, gathering the following information first will make it that quick:
- Recent paystubs for you and your spouse, if you’re Married Filing Jointly, for the following:
- Annual salaries and bonuses;
- Contributions to your workplace retirement account – 401(k) or 403(b), not an IRA;
- Pre-tax deductions for items such as health or dental insurance;
- Federal tax withheld in the most recent pay period;
- Total federal tax withheld so far during 2018;
- Your 2017 tax return:
- It will ask for non-wage income such as dividends in a taxable account – again, this is not your IRA or 401(K) but an after-tax investment account;
- If you expect to make a tax-deductible contribution to an IRA (did you last year?)
- It will ask if your itemized deductions will exceed the new standard deduction for 2018 - $24,000 for a couple Married Filing Jointly – and, if so, what they are. Your 2017 tax return will help with this.
Find the Calculator here: https://apps.irs.gov/app/withholdingcalculator/index.jsp.
Once you complete the calculator it first tells you if you are projected to owe tax or if you should expect a refund for the year. In my case of owing this year, it provided me with easy to understand instructions on what to do to make my withholdings equal my total 2018 federal tax.
The IRS gets some well-deserved criticism for often providing instructions even CPAs struggle with but, in this case, they are quite clear and understandable. They told me exactly what to fill out on a new W-4 in each line and what the outcome will be at the end of the year. Now, remember, this is garbage-in, garbage-out so if I gave faulty information the outcome will be incorrect. But, the calculator is a really good tool.
Thank you for your continuing confidence.
Past performance is no guarantee of future results. The opinions expressed are those of Moneywatch Advisors, Inc. and are no guarantee of the future performance of any particular fund. This information is for educational purposes only and is not intended as investment advice. Please consult your financial advisor for more detailed information or for advice regarding your individual situation.