(This June 26 story corrects the penalty rules to 100% of last year’s tax from 90% in paragraph 20)
By Beth Pinsker
NEW YORK (Reuters) - The Internal Revenue Service would like American taxpayers to look over their paystubs and make sure they are withholding the right amount - please.
In the first year of the new tax law, 2018, Americans underestimated how much they needed to withhold from each paycheck to cover their tax bill. While final IRS data is not yet available, one snapshot from the agency is that total refunds for 2018 tax returns were down 1 percent from the prior year, and the total amount given back was $7.7 billion less.
The amount of taxes taken out of each paycheck, which is set by the W-4 form each employee has on file with their employer, will be off again for 2019 unless people take steps to change.
Trouble is, doing a paycheck checkup is more challenging than it should be.
After Matt Longo finished his taxes a few months ago, he realized his refund was too large, so he clicked on the IRS calculator (www.irs.gov/paycheck-checkup) to figure out how he should adjust the numbers with the payroll provider at his job.
To do this, he needed his tax return from the previous year, his most current paystub and a good estimate of what he would make for the rest of the year, including all his other income and deductions.
“It wasn’t something I could do over lunch at work, or even in an afternoon,” said Longo, a 28-year-old single public relations worker in New York, who is also in business school.
Longo spent a Saturday afternoon on the maddening process of plugging in the numbers, to finally get to an estimated result.
The trouble is that withholding used to be based on the concept of exemptions, which were conveniently small, round numbers. If you were single, but had a dependent, you might claim one exemption. If you had other factors that lowered your taxes - like a property tax deduction or big charitable donations - then you might claim exemptions for each, without having to specify anything on the form or even do any math.
You could work it the other way around too - claiming fewer exemptions than you were eligible for - so the government would take out more money than you actually needed to pay. This might get you a refund at the end of the year, or it could compensate for a spouse who works freelance to spare them quarterly estimated payments.
But now exemptions are gone. So to figure out your withholding tax, you need to examine your whole tax picture from the year prior, your current financial position and your estimate of what you will make for the rest of the year.
There are ways individuals can make the process less onerous, without having to resort to a calculator.
Here are some tips:
* Make withholding decisions part of your tax prep process
Rather than think of a W-4 as a workplace payroll issue, think of it as part of yearly tax prep.
ADP, the largest payroll servicer, advised major tax preparation companies to bundle this into their software as just another step in the tax return process.
“Send the return, but don’t stop there,” said Pete Isberg, vice president of government relations for ADP.
* Go with last year’s estimate
If running all the numbers is too hard, just skip it. As long as you pay what you owed last year, or slightly more in higher income brackets, you will not be charged with a penalty.
* Keep your details to yourself
The proposed draft for a new W-4, which will go into effect in 2020 (here) asks for a lot more detailed information about other income and deductions. But it also has a line to put in a dollar amount of any additional money you want withheld each pay period, which you can fill out in place of offering details you might prefer to keep private.
“Maybe it shouldn’t pose a privacy problem, but some people will be reluctant to provide that to their employer,” said Chester Spatt, professor of finance at the Tepper School of Business at Carnegie Mellon in Pittsburgh.
Follow us @ReutersMoney or here Editing by Lauren Young and Steve Orlofsky