AMES, Iowa – As 2019 draws to a close, many Iowans are preparing for the holiday season. However, it’s also time to begin preparing for federal and state income tax season. That includes getting ready to file your 2019 income tax returns, as well as planning ahead for 2020, says Carol Ehlers, a human sciences specialist with Iowa State University Extension and Outreach.
An important step for tax planning is to review how much money is being withheld from each paycheck for federal income tax. Iowans can use a new IRS online estimator to determine whether they are having enough money withheld. The estimator is available at https://www.irs.gov/individuals/tax-withholding-estimator.
“Whether you owed money or received a refund when you filed your taxes last spring, checking your withholding is a good idea,” said Ehlers, who specializes in family finance.
2019 marked the first time taxpayers filed their taxes under the new tax cuts act. Many were surprised to learn that they owed money with their 2018 federal income tax returns. This created the perception that they were paying more in taxes.
Taxpayers who paid taxes with their return in 2019 still may have paid less in total taxes than they had the previous year. However, they had too little money withheld from their paychecks throughout 2018, Ehlers said.
“If you didn't update your withholding in 2018 to reflect changes in the withholding table under the new tax law, then less money may have been withheld from your paycheck each pay period. So, when it came time to file your return, you owed more money,” Ehlers explained.
Iowans who received a large refund in 2019 also might want to adjust their withholding.
“Getting a refund might seem like you are ahead of the game, but it means you gave the government an interest-free loan. That's money you could be using throughout the year to increase savings, pay down debt or do something fun, like take a vacation,” Ehlers said.
Iowans who haven’t updated their withholding in 2019 may find themselves in a similar situation come April 15 when their 2019 federal income tax return is due – either getting a large refund or facing a larger-than-expected tax bill.
Ehlers recommends checking your withholding to make sure you are having the right amount of money withheld for taxes – neither too much nor too little.
“The new tax withholding estimator released by the IRS can help you identify your tax withholding to make sure you have the right amount of tax withheld from your paycheck. Your withholding elections remain in place until you change them by submitting an updated form W-4 to your employer. You also can discuss these matters with your accountant or your tax adviser,” Ehlers said.
Tax planning is part of a comprehensive approach to financial planning to manage tax exposure and free up money for saving or spending. Additional IRS tools to support tax planning are available at https://www.irs.gov/individuals/employees/tax-withholding. For more information on family finance topics, visit the ISU Extension and Outreach Money Tip$ blog.
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