How much tax to withhold? New calculator to help figure it
Millions of Americans are now getting bigger paychecks as a result of the new tax law. So the government is issuing an online calculator for figuring whether enough money is being set aside.
The calculator unveiled Wednesday by the Treasury Department and the Internal Revenue Service helps people determine whether they have the correct amount of money withheld by employers from paychecks — to avoid facing a huge tax bill for 2018. The calculator asks taxpayers to estimate their 2018 income and other items that affect their taxes, such as filing status and number of dependents.
The changes reflect the massive Republican tax plan signed into law in December.
Experts advise checking the calculator to ensure people have the correct number of withholdings and updating W-4 forms filed with employers. At the same time, experts say, the new calculator doesn't provide a fool-proof reckoning; it helps people estimate their tax obligation to determine the amount that should be withheld.
The heftier paychecks for many showing up in recent weeks resulted from employers withholding less money in anticipation of lower income taxes under the law.
The calculator was the government's latest burst of information related to the sweeping $1.5 trillion tax overhaul, the first major rewrite of the tax code in three decades, which took effect Jan. 1. The new law provides steep tax cuts for corporations and wealthy Americans while offering more modest reductions for most low- and middle-income families and individuals.
The calculator is designed to add precision to the income-tax withholding tables issued last month to guide how much employers should set aside as taxes from workers' pay. The tables reflected only some of the changes under the new tax law.
With businesses across the country under a mandate to adopt the payroll withholding changes by Feb. 15, employees started seeing the changes reflected in their paychecks this month.
According to the nonpartisan Tax Policy Center, a middle-income household would on average get a tax cut of $930 this year, lifting its after-tax income by about 1.6 percent. That increase won't be perfectly reflected in paychecks, though, because lower tax withholding on pay is just a piece of a complicated set of changes from the new tax law. What your employer withholds is based on an estimate of your tax obligation that includes many complex factors, but it's not a perfect measure.
As a result, taxpayers may find they are unintentionally over- or underwithholding for their taxes if they don't do some legwork.
"Employees should also use the calculator every year in order to ensure they continue to have the appropriate withholding," Treasury Secretary Steven Mnuchin said in a statement. "This 'paycheck checkup' is more important than ever and will allow employees to see the tax cuts properly reflected in their withholding."
AP Personal Finance Writer Sarah Skidmore Sell contributed to this report.
Calculator is available on IRS website, https://apps.irs.gov/app/withholdingcalculator/