Budgeting, taxes

Did you owe taxes this year?

Many people in the U.S. were frustrated this year by the amount they owed to the IRS. The Tax Cuts & Jobs Act was supposed to save taxes not increase them. First of all, it will help to understand payroll withholding and then how your balance due or refund is calculated.

Payroll withholding is how much your employer holds out of each paycheck and sends to the government to help pay your taxes for the year. Your employer looks at your paycheck amount and calculates how much your tax liability will be if you make the same amount all year. They withhold that amount from the paycheck. That’s why when your paychecks are large, your withholding might be really high.

Balance due or refund is calculated by your actual tax liability minus your payroll withholding for the year. At the end of the year, we add up what you actually made for the year, and then calculate the taxes on that amount of income. This is your tax liability. We then subtract your withholding amount from your tax liability to calculate the balance or refund.

The Tax Cuts & Jobs Act changed the withholding tables. When the tax laws were changed, the employers were given new withholding tables to hold out more or less of each paycheck. So, the idea was to enjoy more of your money during the year. I actually agree that getting a big refund isn’t ideal. I would rather use my money during the year. The government doesn’t pay you any interest. So, they get to use your money all year without paying you for it. Here are two options:

  1. Leave your withholding as is, and save the money to pay your balance due. Divide your balance due from 2018 by how many paychecks you have left in the year, and save that money from each paycheck. Then, when you get your taxes done, you’ll be prepared to pay the money. Having the money planned and set aside empowers you to go get your taxes done early, and be able to say “I’m prepared.”
  2. Change your withholding. The IRS offers a paycheck checkup on their website. You can go here and enter your information to know what to tell your employer to withhold from your paychecks. You calculate the exemption amounts. If you don’t think it will fix your amounts enough, talk to your employer about other options. You can claim less exemptions, you can withhold at the higher single rate, and/or ask your employer to withhold an extra percentage or amount from each paycheck.

Give yourself the power to understand taxes and you will feel better at tax time. Nobody really likes taxes but it is so much easier when you are prepared. Without getting too political, our taxes do pay for many incredible things like education, roads, and safety.

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This guy says thank you.

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