The Miser’s 3 Things:
- Your paycheck probably went up because of the new tax law.
- You’ll want to check that you’re getting the right amount to prevent surprises on next year’s tax return.
- Your tax preparer can help, or you can use the IRS’s online resources detailed below.
A few weeks ago, I wrote about how The Miser’s biweekly paycheck went up $75 because of the new federal tax law.
Not long after, I paid a visit to my tax preparer to file my 2017 tax return. The new tax law has no effect on the 2017 return but, not surprisingly, she was already looking ahead to the many changes coming this time next year.
As I’ve written before, the major change for many single filers is that the standard deduction will increase from $6,350 to $12,000. However, the $4,050 personal exemption is going away.
These two changes will effectively lower the taxable income of a single filer like The Miser by $1,600 next year if our salaries and other income from investments, interest, etc. stays exactly the same. (That $1,600 is calculated this way: $12,000 minus $10,400, which is the sum of the old standard deduction and the personal exemption.)
As my tax preparer explained, if my company did nothing to adjust my withholdings throughout 2018, the size of my tax return next spring would simply increase by $1,600.
But as I mentioned at the top of this post, my company did adjust my federal withholdings (by $75 every two weeks).
So, we were able to run that $75 through a calculator, multiply by 24 pay periods (the first two pay periods of the year were still using the old withholding), and show that I will be getting $1,800 extra in my paychecks over the course of the year because of the withholding change.
That’s more than the $1,600 that it should be, which means I’m probably in line for a somewhat smaller federal tax refund next year than what I’m used to.
This isn’t necessarily a bad thing. A big refund means we gave the government too much of our money during the year in the form of a no-interest loan. If you don’t like this thought, it’s best to be withholding the right amount from every paycheck.
You can find out if you should adjust your withholding by using the IRS’s 2018 Withholding Calculator. It doesn’t take long — as long as you can estimate your 2018 income and have your most recent payslip available to see your current federal withholding and tax-deferred retirement contributions.
If the calculator shows you will owe a significant amount of money because of the tax law and your employer’s withholding changes, you might consider filling out a new W-4 for your employer. That will get your withholding more in line with reality.