Tax refund: Do this now to avoid last year's chaos
Many people did not check their withholding amounts leading into last tax season despite the government’s advice to do so
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If you were one of the many Americans surprised by your tax refund – or bill – last year, the end of the year is a good time to make sure you are not in for more of the same in 2020.
Last year was the first filing under the sweeping changes enacted via the Tax Cuts and Jobs Act. Many people did not check their withholding amounts leading into last tax season despite the government’s advice to do so. As a result, many people were confused when they received little or no refunds despite having a similar financial situation to the year prior. Some even owed the tax agency for the first time.
Unless you filled out a new form, your current Form W-4 is still being used. That means any surprises could be exacerbated next April unless you adjust your withholding.
The ultimate goal of proper withholding is to pay so much each month that you neither owe nor are owed come April.
IRS RELEASES NEW FORM W-4: WHAT TO KNOW TO AVOID A REFUND SURPRISE IN 2020
Proper withholding is important for another reason – taxpayers who underpay are at risk of facing a penalty. During any given year, taxpayers can avoid the underpayment penalty if they paid withholding and estimated tax of at least 90 percent of the amount owed.
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The IRS has a withholding calculator that can help determine how many allowances to make.
As previously reported by FOX Business, the IRS released its final version of the 2020 Form W-4 earlier this month, which included a couple of changes designed to make withholding more accurate in conjunction with the Tax Cuts and Jobs Act.
Among the big changes to the form are new boxes for workers to check indicating they hold multiple jobs or are part of a two-earner household – simplifying the process on previous forms.
“While the updated form may initially elicit some confusion for employees, these important changes will ultimately simplify the ability to set and adjust withholding to achieve desired results, such as a specific tax refund amount,” Pete Isberg, vice president of government affairs of ADP, said in a statement. “That being said, the form may require employees to remember specifics from their most recent tax return to properly fill out the form and avoid any issues. The 2020 Form W-4 features significant improvements and simplification for those with multiple jobs and two-earner families.”
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One area of potential confusion, pointed out by ADP, is an area that asks for “deductions other than the standard deduction” – this will require workers to enter expected deductions over the standard deduction amount, not total deductions. Further, the group notes that in two-earner households, for individuals that opt to check the applicable box in Step 2, both spouses should check the box but only one needs to fill out Steps 3 and 4 on the form.
It should be noted that employees with current W-4 forms on file with their employers will not need to update their form unless they switch jobs, have a change in personal status or choose to.