Note to retirees: this withholding checkup will not work correctly for you. You will need to review the Mid-year Estimated Payments Checkup to make sure you have the proper amount of tax being withheld from your various sources, and whether or not it is necessary for you to make estimated payments throughout the year.
The good news is that the IRS has a calculator available that can help you do the withholding checkup. If you go to the IRS’ website (www.IRS.gov) and search for “tax withholding”, you will be able to access the Withholding Calculator – or just click the link to go to the Withholding Calculator page directly. Have your most recent pay-stub available when you go to the calculator.
Mid-year withholding checkup
As you work through the calculator, you’ll need to know a few things about your tax return, so it will be handy to have a copy of your 2017 return available (or at least know the answer to the questions below):
- Filing status
- Can anyone else claim you as a dependent? Same for your spouse if filing jointly.
- How many jobs have you worked (or will you work) in 2018? Same for your spouse.
- Do you have a 401k, cafeteria plan (such as healthcare or child-care) through your employer? Same for spouse.
- Will you or your spouse receive a taxable scholarship or grant in 2018?
- Are you or your spouse age 65 or older in 2018? Blind?
- Number of dependents (not including spouse) to claim on your 2018 return.
- Number of children that will be claimed for child-care expenses, child tax credit, and earned income credit
You’ll also need the specific information from your pay-stub: gross income, bonuses, deferred income (to a retirement plan), how much is being withheld for income tax (be careful and only count the income tax, not Social Security or Medicare tax, or FICA), and how many pay periods are remaining. For all of this information, you will need the current pay period amount and the total year-to-date amount, as well as how often you are paid, with how many pay periods are remaining. You’ll need to gather this information for each job that you hold or intend to hold through the year.
Next, you’ll add in any non-wage income – such as rental income, interest and dividends, or partnerships and corporation income. You’ll also estimate any reductions to income that you may have, such as deductible contributions to an IRA. If you’re not sure about these numbers (and who could be, this early in the year?) then just use the figures from your 2017 tax return.
After that, you’ll need to estimate your deductions. If you’ve always used the standard deduction in the past, chances are you’ll continue to use the standard deduction in 2018. If you have had circumstances change, such as buying a house, moving to a higher-tax state, you’ve made significant contributions to charity, or you have significant medical expenses (beyond insurance coverage), then you’ll want to go through the exercise of calculating your itemized deductions. The calculator steps you through the process of estimating your taxes, medical expenses, interest paid on mortgages, charitable contributions and other itemized deductions.
The result will show you how you should make changes (if needed) to your W-4 with each employer. If you make these changes, your withholding should be adjusted to fit your income tax needs for the current year.
It is critical that, if you make changes to your W-4 as a result of this withholding checkup, you should come back and re-check again early in the following year to make sure everything is set up correctly for the coming year.