President Donald Trump and the Republican-controlled Congress passed a major overhaul of the United States tax code in late 2017 that will impact what you owe for 2018. Whether it will benefit you or require you to pay more to the IRS will depend upon your tax bracket and your exact filing situation.
The changes were fairly extensive, so U.S. workers should have sat down early this year, done some preliminary analysis, and made adjustments to their finances accordingly. Those might have included changing their spending or saving habits a bit, but it most certainly should have included examining the tax withholding amounts from their paychecks.
Unfortunately, most Americans didn't do that. According to a new survey from Jackson Hewitt, 59.2% of workers said they have not updated their withholding for 2018, 12.8% weren't sure if they had, and only 28% said they'd done it.
Why is this important?
Withholding -- the money your employer takes directly out of each paycheck and sends to the federal and state tax agencies on your behalf -- is designed to leave you about square with the tax collectors at the end of the year. Many people have too much money withheld, and end up getting refunds. That's essentially giving the government an interest-free loan, but it's not as bad as not having enough taken out and owing penalties.
"The IRS changed the withholding tables back in February due to tax reform. Some taxpayers may have noticed an automatic change in their paycheck due to the withholding rate reduction, but this may or may not reflect their real position which is why the IRS urged taxpayers review their withholdings," wrote Jackson Hewitt Chief Tax Officer Mark Steber in an email to The Motley Fool. "It's surprising to learn that most did not update their withholdings this year – these taxpayers can expect to see a difference in their refund or taxes owed, compared to last year."
What can you do?
Changing your withholding now won't change anything, since you have at most two paychecks before the end of the year. You can, however, figure out what you should have been sending to the IRS, and calculate if you're headed for a heftier than usual bill when you do to file your taxes in a few months.
If you have been significantly underpaying, this will at least give you some time to prepare before the bill comes due in April. But even if you're getting a refund, that doesn't mean you shouldn't make changes with 2019 in mind.
"Taxpayers cannot change the withholdings that have come out of their paycheck the entire year, but they should certainly consider updating them now," Steber wrote. "We don't anticipate another withholding table update in 2019 so taxpayers should review their withholdings, and if they need to make changes, provide an updated W-4 to their employer."
Your tax situation should not be an April surprise: Make sure that you adjust your withholdings to accurately reflect what you expect to owe. Ideally, that will leave you either owing a tiny bit or getting a tiny bit back. But if that's not how your household's math comes out for 2018, it's important to recognize why, and fix it for 2019.