Tax Cut or Reduced Withholding?

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Tax Cut or Reduced Withholding?

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Decreased refunds are in the news, but there are steps you can take to avoid surprises next year.

Tax Cut or Reduced Withholding? By Judy Heft

The new tax law is in full effect this year, and accountants are struggling to learn it. In fact, an accountant friend of mine said he anticipated spending the next two years learning about the intricacies of the tax changes. That said, the meager or non-existent tax refunds we’re all grappling with are not the fault of our accountants. It’s all about withholding.

When Congress passed the Tax Cuts and Jobs Act, there was a great deal of emphasis on paychecks, and how Americans should see a rise in their net income. I’m not being partisan because the facts speak for themselves: Congress actually increased our paychecks by reducing our withholding, not necessarily by reducing taxes. That’s why we have no refunds; that money was never collected in the first place — and that was called a “tax cut.”

Luckily, we are able to customize our withholding amounts on Form W4. If you’re not super attentive when signing government papers, the W4 is the form on which you indicate your number of dependants and any additional money you would like withheld.

Some CPAs are playing it safe, advising clients to redo their W4s and withhold twice the amount they usually would. Not everyone is willing or able to do that, and for them, there is a powerful tool on the IRS website called the Withholding Calculator. It will help you figure out how much money should be withheld each pay period in order to get a refund in 2020 — or at least to not owe in 2020.

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