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Revised W-4 has workers cruising for tax bruising

Understanding and updating tax withholding can help employees with budgeting and saving for retirement.

The Internal Revenue Service released a new W-4 last year, but only 26% of Americans have updated their withholding since then, leaving them at risk for an unexpected tax bill in April, according to the American Institute of CPAs.

What's more, 37% of taxpayers say they aren't even that familiar with the W-4 and 11% have never heard of it.

"There have been a number of changes to withholdings over the past three years, and we've found that many Americans haven't been making adjustments accordingly," Gregory Anton, CPA, CGMA, and chairman of the AICPA's National CPA Financial Literacy Commission, said in a statement. "Inaccurate withholding can lead to an unpleasant surprise come Tax Day."

Other findings show Americans generally aren't keeping up with tax withholdings to make sure that they are being taxed appropriately:

  • 16% of taxpayers updated their withholdings after the Tax Cuts and Jobs Act in 2018.
  • 14% of taxpayers last updated their withholdings before both the act and the revised W-4 form.
  • 45% of taxpayers don't know when the last updated their withholding.

Anton noted that recent financial stresses caused by the coronavirus pandemic mean taxpayers should be proactive about tax changes so they can keep more of their money and avoid surprising tax bills.

"With many individuals in a financially precarious position, it's more important than ever to understand how withholding impacts your cash flow and overall financial situation," he said.

Taxpayers don't have to submit a new W-4, but it may make sense for them to do so, AICPA recommends. However, the organization discovered that some people are paying more than they need to deliberately. Fifty-six percent of taxpayers said they pay an inaccurate amount of taxes on purpose. Most of those (71%) pay more than they owe so that they can get a refund in the spring, and 29% underpay throughout the year.

That strategy might not be paying off, as AICPA found that in the last three years, almost 30% of taxpayers had an unusually large tax bill or refund. IRS filing statistics show that the average tax bill in 2019 was $5,527, but 39% of taxpayers said they weren't confident they would be able to pay a $3,000 tax bill on short notice, AICPA found.

"People tend to overlook a few extra bucks in their take-home pay, but they sure notice when they get a $300 tax bill instead of a $1,500 refund," added Anton. "This underscores why understanding and updating your tax withholding is so important — it directly impacts your budget."

As for taxpayers who overpay in expectation of a refund, Kim Hardy, CPA, and a member of the AICPA's National CPA Financial Literacy Commission, said that they would be better off investing in an interest-bearing account.

"A tax refund is often seen as a windfall, but there is an opportunity cost to over-paying and having the IRS hold your money interest-free. If you recently got a large tax refund, I recommend taking 15 minutes to update your W-4 so the amount you withhold roughly equals the taxes you'll owe. This will allow you to have more money on hand throughout the year that can be better spent staying current on bills, paying down debt or being invested," she said.

 

This article was written by Danielle Andrus from BenefitsPro and was legally licensed through the Industry Dive publisher network. Please direct all licensing questions to legal@industrydive.com.

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This information is provided by Voya for your education only. Neither Voya nor its representatives offer tax or legal advice. Please consult your tax or legal advisor before making a tax-related investment/insurance decision.


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