Here’s a foolproof way to ensure you get a healthy tax refund every April: Deduct far too much from your paycheck throughout the year. That way, when tax season rolls around, you’ll get reimbursed with a big check.
If that sounds like a gimmick, and you’d rather just pay what you owe, consider spending some time with the IRS’s new withholding calculator, designed to help you figure out whether your paycheck truly reflects your tax liability under the recently passed Republican tax cuts.
The problem is that those tax cuts have thrown a wrench in the whole withholding system, leaving companies in the dark about their employees’ real tax obligations, and opening more Americans to the risk of big surprises come April 2019 — whether in the relatively pleasant form of an oversized rebate or the less-thrilling prospect of a big unwanted bill.
Businesses lack the details they need to make accurate projections about your tax situation. All the information you submitted as part of your W-4 worksheet was based on now-outdated tax laws. So it doesn’t account for factors that are suddenly quite important, such as whether you’re likely to hit the new $10,000 cap on deductions for state and local income and property taxes.
And rather than wait for new W-4 worksheets to be available, the Trump administration encouraged businesses to make changes quickly, so that workers could start seeing the benefits of its signature tax cuts.
Enter the IRS online withholding calculator.
To use it, you’ll need to be extremely well-informed about your tax situation. The agency recommends having a pay stub nearby, along with last year’s tax return — and even that may not suffice. You’ll need to know all sorts of details about your income, your spouse’s income, likely deductions, adjustments (which are different from deductions), and how to parse some of the IRS’s less-than-limpid instructions. (The all-important question about how much you expect to pay in state and local taxes is sparsely labeled as “taxes you paid.”)
Your results will only be as accurate as the information you plug into the calculator.
If all this sounds daunting, there are alternatives.
You could consult an accountant, who should be well-versed in the nuances of the new tax law and able to quickly size up your withholding situation.
Or you could stop up your ears, ignore the entire issue, and simply tell your employer to withhold the maximum amount by submitting a new W-4 claiming zero allowances. That way, you increase the odds that you’ll pay more than enough to the IRS each pay period — which you can reclaim later, in the form of a healthy refund.
Yes, there’s a cost to this strategy of overpaying: Every excess dollar handed to the IRS is a dollar you can’t spend now or invest for the future. Instead, you are essentially giving the government a zero-interest loan.
But even here, a lot depends on your habits. If you have trouble saving money out of your regular paycheck —
Plus, people love getting refunds. They seem like gifts from the government, even if we know we’re really just getting our own money back. And overpaying helps ward off the fearsome risk of a big April bill, which can be especially painful for us loss-averse humans.
Whatever the reason, about three of four taxpayers ultimately choose to pay too much in exchange for a later rebate.
But if that doesn’t appeal to you, and you’d rather manage your own cash flow, the new IRS withholding calculator is your friend. With it, you can find out if you’re prepaying the proper amount of money to the IRS — no more, no less.Evan Horowitz digs through data to find information that illuminates the policy issues facing Massachusetts and the United States. He can be reached at email@example.com. Follow him on Twitter @GlobeHorowitz