Here’s the One Tax Mistake You’re Probably Making (and How to Fix It)
Do this and you’ll see more money in your next paycheck
Getting a huge tax refund check from the IRS feels good — real good. So good you might want to make like Chantalle here from “The Wolf of Wall Street” and just tape it all over yourself.
But if you’re expecting a big check this year, you’ve made a huge tax mistake. A big refund from the IRS in 2018 means your employer withheld way too much in income taxes from your paychecks in 2017.
Your paychecks could have been larger all year long. You could have put that money toward paying down high-interest credit card debt, or reducing your student loans. You could have even put a little bit extra in your 401(k) or Roth IRA.
But instead, you gave the federal government an interest-free loan. It’s a mistake most people make: The average tax refund in 2017 was nearly $2,800.
The good news is that even if you blew it last year, there’s plenty of time left to get your taxes straight for 2018. Here’s what you need to know to get your money right — and start seeing bigger paychecks.
The IRS can give you a quick (free!) tax checkup for 2018
The Internal Revenue Service has a great tool available on its website where, after answering a few questions about your taxes and job, you can find out your tax bill for 2018. It’s called the IRS Withholding Calculator, and it’s been recently updated to account for changes due to the Tax Cuts and Jobs Act of 2017.
You’ll want to have a recent pay stub handy so you can answer questions about how much you’re currently being paid, how much you put in your 401(k), and how much in tax is being withheld from each check. If you expect to file jointly or have a second job, you’ll need that extra pay stub as well.
You’ll also be asked questions about major tax credits you expect to claim (such as the Earned Income Tax Credit), and any other sources of income you may have (such as bank interest). A completed copy of your 2017 federal income taxes will come in real handy here.
(If you’re still putting that off, here’s how you can e-file your 2017 federal taxes for free.)
The IRS calculator will then tell you whether you’re overpaying or underpaying your taxes with every paycheck. It’ll also tell you the number of allowances you should claim for the rest of the year to get closest to paying your true tax bill.
Here’s how to increase your next paycheck
Once you know how many allowances to claim, your next step is to fill out a new Form W-4 and give it to your employer. You can download and print a W-4 (PDF file) from the IRS website here.
After filling out your name, address and social security number, you’ll write the number of allowances the IRS Withholding Calculator told you to take on Line 5. If you’re worried this might not be enough, you can use Line 6 to withhold additional money for taxes in any dollar amount you choose.
The sooner you do it, the sooner you’ll see a bigger paycheck. Just be sure to use that extra cash for something smart!
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This story has been crossposted to Finance Republic. Follow Finance Republic on Facebook and Twitter.
