What to do now if you think you'll owe the IRS money next year
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More Americans will get a bill when they file their 2018 tax returns, a government report finds. While the new tax law will lead to bigger refunds for many people, workers who haven't adjusted the amount of money set aside for taxes each paycheck following its passage might owe the IRS in April.
The Government Accountability Office estimates that 21% of taxpayers are not setting aside enough money from their paychecks to cover their tax bill, up from 18% without the new law, in a report published Tuesday.
The tax law, signed in December, lowered taxes for most people, but not all. Some people, especially high earners in high-tax states, could owe more because the law limits deductions for state and local taxes.
If these people didn't fill out a new W-4 form instructing their employers to set aside more money from each paycheck to cover their bigger tax bills, they could end up owing a chunk of money to the IRS in April.
The IRS has a calculator that tells you how much you should withhold from each check. It figures out your withholding based on your salary and other financial information. The more data you feed the calculator, the more accurate it will be.
This should be straightforward for people who get a steady salary and therefore have a predictable tax bill, but someone with a less reliable income, like a business owner or someone who works on commission, may need the help of an accountant, said Allan Katz, a certified financial planner and president of Comprehensive Wealth Management.
Taxpayers can also bring their 2017 tax return to H&R Block for a free tax reform checkup to see how the law will affect their return, said Jackie Perlman, principal tax research analyst for H&R Block.
None of this affects how much you owe in taxes. Your tax bill is the same, regardless of how much you withhold.
You pay your tax bill ahead of time by withholding a certain amount from each paycheck. You get a refund when you withhold too much from each paycheck and you owe the IRS when you don't withhold enough.
Getting a big refund might feel great at the time, but it means you've let the government hang on to that money all year, when you may have found a more profitable use for it. That's why some people prefer to get a small refund or even owe a little money, Perlman said.
If you think you'll owe money in April, make sure you set aside enough to pay the IRS, or you'll face penalties, Katz said.
There's still plenty of time to avoid owing money, however. You can ask your employer for a W-4 form to change your withholding; some let you fill out the form online.
You should update your withholding any time you expect your tax bill to change, like if you move, change jobs, get married or have a kid, Perlman said. The amount you owe can change even when there's not a new tax law.
"It's nothing to panic about," she said.
The IRS calculator or a financial adviser can help you estimate how much to withhold. It's August, so there's still lots of time to catch up if you haven't withheld enough.
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