Many Americans are at risk for an unexpected tax bill in April because they are unaware of the latest changes to the redesigned W-4 that staff fill out to calculate exactly how much federal tax is on each paycheck, the American Institute of to withhold is CPAs reported on Tuesday.
Related Topics: IRS: Corporate Spending Tax Deductions and PPP Loan Granting Don't Mix (Usually)
A survey conducted by The Harris Poll found that 37% of taxpayers were unfamiliar with the W-4, including 11% who said they had never heard of it.
"An inaccurate withholding tax can result in an unpleasant tax day surprise," said Gregory J. Anton, chairman of the AICPA's National CPA Financial Literacy Commission, in a statement.
"And with many people in a financially precarious position, understanding how holding back affects your cash flow and overall financial health is more important than ever."
The new Form W-4, released by the Internal Revenue Service late last year, no longer contains allowances and makes it easier to coordinate across jobs and with a spouse.
But only 26% of Americans surveyed said they had updated their withholding taxes since the IRS released the redesigned W-4, and only 16% had changed their form after the Tax Reduction and Jobs Act revised the withholding tax tables in early 2018 . Fourteen percent of respondents said they last updated their withholding tax before any of these major changes.
Worst of all, 45% of accountants had no idea when they last updated their withholding tax.
When taxes were filed in 2018, many Americans were reportedly confused when they were unable to get a tax refund, according to the report. The new tax law lowered tax rates above income levels to ease the income tax burden on Americans. However, because the withholding tax tables were also updated, many did not get the refunds they expected.
"People tend to overlook a few extra dollars for their take-away pay, but they'll surely notice when they get a $ 300 tax bill instead of a $ 1,500 refund," Anton said. "This underscores why understanding and updating your tax withholding is so important – it directly affects your budget."
Related Topics: Human Capital: Why Ed Slott Believes Taxes Go "Through The Roof"
The Harris Survey conducted the online survey of 2028 adults in the United States between October 1st and 5th. The answers are for the 1,636 who have filed income tax over the past three years.
Consequences of inaction
Although the IRS does not require American taxpayers to file the new W-4 unless they request a change in their withholding tax or a new job, it may be beneficial to re-examine the form to ensure that the Current withholding tax is correct, especially if it is a personal or financial tax situation has changed, the AICPA said.
When asked about the federal withholding strategy, only 44% of taxpayers said their goal was to pay as close as possible to the exact amount. Fifty-six percent said they purposely paid an inaccurate amount of tax year round.
Of these, 71% would prefer an overpayment and a refund, and 29% would prefer an underpayment and would not mind an invoice.
Regardless of strategic intent, 28% of Americans who file taxes report having received an unusually high tax charge or tax refund in the past three years.
According to the AICPA, those who don't take enough money off their paychecks can face a tax bill or, worse, a fine. In the past three years, two in ten taxpayers reported having received an unusually high tax burden.
Of these, two in five said they were extremely or very surprised and felt differently concerned, frustrated, disappointed, or angry.
According to IRS tax statistics for the 2019 fiscal year through July, the average tax charge for American taxpayers who owed money at the time of filing was $ 5,527. Still, 39% of respondents said they weren't sure they could pay a $ 3,000 tax bill in the short term without using a credit card or borrowing money.
Those who take more money off their paychecks year-round than they owe on filing taxes are likely to receive a tax refund. One in ten taxpayers says they have received an unusually high tax refund in the past three years, according to the AICPA. Two in five said they were extremely or very surprised and felt excited, confident, or relieved.
"A tax refund is often seen as a godsend, but there are opportunity costs in overpaying and the IRS keeping your money interest-free," Kim Hardy, a member of the AICPA's National CPA Financial Literacy Commission, said in the statement.
"If you recently received a large tax refund, I recommend taking 15 minutes to update your W-4 so the amount you withhold is roughly the same as the tax you owe. That way you have You have more money available all year round, which you can better use for bills, paying off debts or for investments. "
– Based on ThinkAdvisor: