Can I Estimate Tax Liability For The Year?

Editor’s Note: If you’re wondering if you can estimate tax liability for the year, the short answer is “yes” – through the Form W-4. This form offers a tax liability formula and will help you answer “how much tax should I withhold?”.  

Determining the “right” amount of federal and state taxes to withhold from each paycheck is not a new challenge, but the Tax Cuts and Jobs Act (TCJA) caused many taxpayers to revisit this question: Should I change my withholding? And, how can I estimate tax liability?

Why is it Important to Estimate Tax Liability?

The amount of federal and state taxes you withhold from each paycheck determines whether you’ll get a refund, break even, or owe taxes when you file your tax return. The goal is to eliminate any surprises at tax time.

“Am I Withholding Enough?”

Many American employees wonder “Am I withholding enough taxes each paycheck?” Sometimes, it is not enough to claim the highest default withholding that you can on the W-4. You may need to calculate if you need to pay extra each month. The W-4 has a method for you to calculate that.

“How Much Tax Should I Withhold?”

Some taxpayers like to get a large refund, some prefer a small refund, and others prefer a small balance due, taking comfort in knowing they didn’t make an interest-free loan to the government.

Regardless, everyone should aim to withhold at least enough to avoid any underpayment penalties.

How to Cover Your Tax Liability Through Withholding

To learn how to not owe taxes when you file your return, you should read and complete your W-4 Form each year or when you have a change in your circumstances such as marriage, divorce, having a child, or when you have a change in income. Use Form W-4 to adjust your tax withholding, if necessary, after you have an idea what your tax situation looks like for the full year. Without estimating your tax liability (see below), changing your withholding is like shooting a target while blindfolded. This is especially true in a year when there are tax law changes, even if you don’t expect any changes in your personal life.

How to Estimate Your Tax Liability

To figure out if you are withholding enough federal taxes, follow these steps to estimate your tax liability for 2019:

1. Review last year’s tax return. If you filed your tax return for 2018, take a look at your “total tax” (line 15, Form 1040).
2. Estimate tax liability. Look at last year’s return and project the upcoming year’s tax return based on any known or expected changes in your personal tax situation. This is an important and sometimes complicated step, so you may want to get help from a tax professional or use H&R Block’s income tax calculator.  Changes in your life (children, marriage, new job, etc.), or other complexities (like owning a small business, personal investments, or earning extra income from a side job) can significantly change your tax bill, as can tax reform overall.
3. Determine how much has been withheld so far. You can find this information on your last earnings statement or payroll stub.
4. Subtract the withheld taxes from your projected tax bill. This is the amount of withholding you’ll need for the rest of the year to closely match your estimated tax liability.
5. Divide the amount you still owe by your remaining pay periods. This is the amount you should withhold from each paycheck for the rest of the year to cover your estimated tax bill.
6. To make changes, complete a new Form W-4. If you want a larger refund, you’ll make changes so your employer will withhold more tax. If you submit the form in 2019, you will reduce your “withholding allowances.” This increases the taxes your employer withholds (and reduces your take-home pay). Or, you can add a fixed amount to be withheld from every paycheck. If you want a smaller refund, or a balance due, increase your allowances. This will reduce your withholding (and increase your take-home pay).
7. Complete the new Form W-4 as soon as possible. The longer you wait, the fewer pay periods you’ll have to take advantage of your new withholding amount.

How to Estimate Your 2019 Tax Liability – An Example

You and your spouse earned a combined $80,000 in 2018. You have a 15-year old daughter. You claimed the child tax credit and you use the standard deduction. Your federal tax bill for the year was about $4,340, and your employer withheld $4,500. So, you received a refund of around $160.

Time to roll up your sleeves – and do a few calculations to estimate your 2019 tax liability.

You don’t expect any major life or job changes this year, aside from a 2% pay raise. You experienced how TCJA impacts your tax return – the standard deduction has increased, dependent exemptions have gone away, the deduction for state and local taxes has been capped, and the child tax credit has doubled. What does that mean to you?

After following the steps above, you estimate that you’ll owe about $4,480 in 2019.

Despite no changes in your personal life, there are several tax changes that will affect you in 2019, just like they did in 2018. These changes include:

• Lower tax rates – your marginal tax bracket is 12%
• Loss of personal exemptions (not available after 2017)
• Larger standard deduction that you expect to exceed your itemized deductions
• Larger child tax credit, doubling from $1,000 in 2017 to $2,000 in 2018 and 2019

The good news? Your withholding covers your tax liability. The bad news? Pretty soon, your child will turn 17, and that’s a change that you need to account for through tax withholding. Once she is 17, you may qualify for the other dependent credit instead of the child tax credit. The other dependent credit is only worth $500, and you’ll need to account for the $1,500 difference through increased withholding.

When to Use a Tax Liability Estimator and Check Withholding

It’s a good idea to take a look at your tax situation now so that you’re not surprised at tax time with a smaller refund or a balance due. Follow the steps above to learn how to estimate your tax liability, make an appointment with a tax pro for help with planning your W-4 withholding. You just may thank yourself in the future.