(Corrects typographical error in headline to ‘do’ instead of ‘so’)
By Beth Pinsker
NEW YORK, Feb 5 (Reuters) - When I received my first paycheck reflecting the new tax law, I was worried.
I hate to owe money to the IRS at the end of the year and have always adjusted my W-4 tax withholding form to take out enough to ensure a small refund at year’s end.
The amount withheld from my check for federal income tax seemed too low to cover my whole tax burden for 2018, given that usually itemize my deductions beyond the new higher standard deduction - even if I would get a bigger tax credit for my two kids.
The Tax Policy Center calculates that the new tax law will, on average, result in a cut of about $1,200 per family this year, but what I have learned covering personal finance is that there is really no average person when it comes to taxes. Everyone’s situation is different.
Many Americans might not know how to assess whether the amount of withholding from paychecks is correct, which is why I looked for expert help. I took my questions to Leon LaBrecque, a certified financial planner who is also a tax attorney, a certified public accountant and a chartered financial analyst in Troy, Michigan.
To figure out if anyone’s withholding is correct, LaBrecque looks deep into the paystub and also considers past tax liability. He did this with employees in his office to make sure their new withholdings were correct - most were.
It turns out my withholding drop was due mostly to my filing status. As a divorced mom of two, I file as head of household, which falls between single and married in taxdom. There is no withholding formula for that status, which about 22 million American households use, and filing as a single person leads to too much withholding but joint filing status takes too little.
I was withholding as married, with two allowances. That filing status made things complicated, but the married numbers were closer to what LaBrecque thought my 2018 bill would be than listing as single.
By contrast, Heather Baer, a 39-year-old teacher in Massachusetts, saw a bigger amount withheld from her check, making her take-home pay drop. This is because she files head of household as a divorced mom with two kids but was listed as single on her W-4 form.
“I am flabbergasted,” said Baer, who after investigating her options thinks she will now switch her withholding to married.
Among others who might have special concerns about whether their new withholding is correct are around 5 million taxpayers who owed Alternative Minimum Tax (AMT) in the past, people whose total itemizations exceed the new standard deduction of $12,000 for individuals, those with many children and, really, anyone who adjusted their W-4 previously to change the amount of money taken out of their checks.
Bruce Steiner, a 67-year-old attorney in Manhattan, is one of them. He previously had to pay AMT, an additional tax imposed on high earners on top of regular tax. Steiner adjusted his withholding to take out extra each month - and then usually owed a big check at the end of the year any way.
The new tax law preserves the AMT, but changes the income qualifications, so Steiner thinks he will no longer have to pay it. At the first opportunity, he changed his W-4 form to wipe out the extra amount.
The IRS is planning to update the W-4 form by spring, and services like TurboTax plan to offer online calculators to help taxpayers estimate.
For those who do not want to do math or worry about a hulking tax bill, the smart thing to do is save any increase in your pay, suggested Kelley Long, a Chicago-based financial planner and CPA with an expertise in personal finance.
That is how Jessica Krakoski, a 34-year-old public relations executive in Austin, Texas, is approaching it. When she got her first paycheck with increased pay, she did limited math.
“I just calculated how much it would be per month,” Krakoski said. The extra $200 she will receive is now set to go automatically into her savings account.
Krakoski tax situation will change again soon, though, as she is expecting her first baby in the summer. Any shortfall she has will probably be made up with a $2,000 child credit.
Editing by Lauren Young and Steve Orlofsky