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Marc A. Hebert's Money Sense: How to figure whether your tax withholding is enough for 2018

January 26. 2018 6:17PM

Now that we are in a new tax year with many changes to tax brackets and deductions, it is time to conduct a review of your tax situation for 2018. Among the items on the list should be your income tax withholding.

Our tax system is in a sense a "pay-as-you-go" one. As such, failing to estimate your federal income tax withholding properly can cost you in a number of ways. By over-withholding and receiving a refund on your return, you provide the IRS with an interest-free loan. You are only getting back the money you earned in that year. The opposite situation - in which tax is due - means you might have to find some cash. You might incur interest and penalties as well.

The objective is to have just enough taxes withheld so you are close to what you owe.

Your employer uses Form W-4 (Employee's Withholding Allowance Certificate) to determine the amount of income tax that will be withheld from your regular pay. It is available from the IRS website, You can use IRS Publication 505, Tax Withholding and Estimated Tax, to complete your Form W-4 and accompanying worksheets, such as the two-earner/two-job worksheet. Publication 505 can help you compare the amounts you will have withheld versus the amount you could anticipate owing on your return.

The main pieces of information on the form are:

. The number of withholding allowances you want to claim.

. Whether you want taxes to be withheld at the single or married rate.

. The additional amount (if any) you want withheld from your paycheck.

The married status is associated with a lower withholding rate. This is usually selected by taxpayers who are married and file a joint return. Other people (including those who are married and file separately) should generally have taxes withheld at the higher, single rate.

One key term you will see is allowances. Allowances help determine just how much money you receive from each paycheck. The more allowances that you designate, the less taxes are withheld and the more money you keep. The number of allowances considers the following information:

. The number of personal and dependency exemptions that you claim on your federal income tax return

. The number of jobs that you work

. The deductions, adjustments to income, and credits that you expect to take during the year

. Your filing status

. Whether your spouse works

Once you go through this process and actually see how much tax is being withheld, it is time to see how close you came to the estimated amount of tax due. The difference between the should be reasonable.

However, the tax withholding might be off if either you or your spouse start or stop working during the year, decide to start working an additional job, have self-employment income, unemployment income, alimony, interest and dividends. If you are self-employed, don't forget to consider the self-employment tax. Marriage, divorce, birth of a child, a new home, retirement and/or changes in the tax law can also impact your taxes.

If you find that you need to make changes to your withholding, you can do so at any time simply by providing a new Form W-4 to your employer. If you adjusted your withholdings downward, your employer cannot repay any of the tax previously withheld. If your withholding is based on outdated W-4 information for part of the year, it can impact your tax result come filing time.

If you need help, it's wise to consult your financial planner or personal tax adviser.

Marc A. Hebert, M.S., CFP, is a senior member and president of the wealth management and financial planning firm The Harbor Group of Bedford. Email questions to Marc at Your question and his response might appear in a future column.

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