If you weren’t happy with your tax return either because you had to pay more than you thought, or your refund was lower than you expected, now is the time to make a change. If you don’t adjust your paycheck withholdings now, next year could bring an even bigger shock.
Due to the new Tax Code changes, the Internal Revenue Service prompted employers to adjust workers’ paychecks last March to match up what they would potentially owe under the new tax plan. This meant that you likely had a higher rate withheld during the first three months of the year than you did during the last nine.
During 2019, your withholdings would be at the lower rate the entire year unless you make a change. Thus, less tax withheld equals more owed or less of a refund due when you file your 2019 return.
Tools to Help You Calculate the Right Withholding Amount
The number of so-called allowances determines the amount withheld. The fewer allowances you claim, the more is set aside from each check. For example, if you claim four allowances, and then lower it to three, more tax will be withheld from your paycheck.
You can increase your withholdings further by specifying an additional flat dollar amount to be set aside each pay period.
However, if you are using one of the calculators, it is already April. This means that you would need to withhold more, and the longer you wait, the higher that amount becomes.
Another Change is Coming
Just when you thought that the tax changes were complete, there are more changes to come, namely with the W-4 which you use to declare your allowances. Because the W-4 was built around personal and dependent exemptions, which the new tax law eliminated, it needs to be overhauled. This change is slated for 2020.
When the new form is available, you should probably run through the withholding exercise again. Your employer might ask you to fill out the revised form anyway.
Two Sides of The Refund Fence
I am asked frequently by people, “should I expect a big refund or try to minimize the amount that I may owe?” The answer depends on your personality and your savings habits.
For those that insist on not letting the government hold onto one more red cent than they should, your answer is clear. Try to get the amount owed at the end of the year as close to zero as possible by claiming the correct amount of allowances or by having additional money withheld from your paycheck.
I always try to come at answering this question from a savings perspective; are you a good saver or not? If you are not a good saver, it may be a good idea to let the government hold onto a bit more of your money so that you do get a refund.
By having the government hold onto your money, think of it as a forced way to save that you cannot touch. Yes, I get the fact that you are not earning interest on your money, but that might outweigh your inability not to spend the money if you see it every pay period.
The trick in expecting a large refund is knowing what you want to do with that money. Having a specific goal in mind as to what to do with your refund should help guide your decision.