Why That Big Tax Refund Isn’t Something That You Should Celebrate
On the off chance that you are one of the taxpayers anticipating a tax refund this season, don’t go off celebrating just yet: A big IRS check isn’t entirely good news. The taxman began the new filing season on January 28, signifying the first time that taxpaying citizens will submit their returns following the Tax Cuts and Jobs Act. This spring, the agency foresees that it will get over 150 million individual income tax returns.
You’re handing off interest-free loans to IRS
The IRS delivered 4.6 million refunds within only the initial week of the new filing season. According to IRS, as of the week of February 1, the average refund check was $1,865.
Taxpayers protested on Social Media, as they expected at least what they received from the previous year. Even if it feels good to get a fat check from Uncle Sam, at the end of the day, it only means that you’ve somehow overpaid your taxes during the past year.
Check if your withholding tax
If you’re an employee, then your employer might have given you a Form W-4 after hiring. Utilize the form to tweak the tax amount that’s withheld from your salary and list how many personal allowances you’re claiming for your household. However, you should know that claiming more allowances leads to withholding less tax. Underpaying your taxes throughout the year makes you more prone to owing the IRS once you file your return.
The process is now more confusing since the IRS modified its withholding records and Form W-4 to indicate the alteration from the Tax Cuts and Jobs Act. Since they raised the latest tax law to the standard deduction and eliminated personal exemptions, you should now evaluate your Form W-4 to check whether or not you’re withholding the right amount of tax.
Last year’s taxes
This tax season, the IRS is waiving the fine for folks who paid at least 85% of their overall 2018 tax debt. Your tax return for that year should be a useful guide on how your withholding looks under the new tax law. Use that knowledge to modify your W-4.
Reexamine your W-4: To strike a balance for withholding, you should base it on your wage, your spouse’s salary, and the tax bracket you’re in. There’s been a lot of changes to the withholding table this year, plus a decrease in federal income tax rates. Sure, you’re taking home a somewhat higher paycheck. However, you should still ensure that you aren’t withholding too little taxes.
Speak with your accountant: Try to work with a CPA to make a forecast and determine what your tax liability will be by the end of the year. In the ideal scenario, you’ll have a balance due once you file your return, but not one that’s big enough to constitute a penalty.
Dodge tax arbitrage: Withholding less in taxes for having bigger plans with your paycheck will only make you owe Uncle Sam. Don’t risk your money.
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