Are You Withholding the Right Amount of Taxes from Your Paycheck?

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In 2017, the IRS received 152,235,000 tax returns — and of those returns, more than 73 percent were granted a refund. With the average refund last year standing at $2,895, you might think getting a windfall in the spring is a good thing. But rather than giving the government an interest-free loan all year, wouldn't you have preferred to have an extra $241.25 per month in your paycheck?

On the other hand, the 27 percent of taxpayers not receiving a refund may be getting the opposite — a big tax bill. They may not be having enough money withheld from their paychecks for taxes.

This is why it's important to withhold the right amount of taxes out of your paycheck. Let's review how to cover your projected tax liability while minimizing your refund. (See also: Bigger Paycheck or Bigger Tax Refund — Which Should You Pick?)

Meet the IRS Withholding Calculator

With the passing of the Tax Cuts and Jobs Act, many Americans are still trying to figure out the full effects of this legislation on their paychecks. In an effort to help taxpayers make sense of recent changes to the tax law, the IRS updated its Withholding Calculator on February 28, 2018.

While the IRS recommends that all taxpayers take a second look at how much in taxes they're taking out of their paychecks, the agency highly encourages the following groups to check their withholdings for 2018:

• Two-income families.

• People with two or more jobs at the same time or who only work for part of the year.

• People with children who claim credits such as the Child Tax Credit.

• People who itemized deductions in 2017.

• People with high incomes and more complex tax returns.

How to use the IRS Withholding Calculator

Here's your game plan to achieve a "Goldilocks" withholding rate on your paycheck this year.

1. Gather your latest pay stub(s) and latest tax return

If you don't receive a pay stub in the mail, contact your human resources office to get a copy or learn how you can download one online from your company portal. Depending on your unique financial situation, you may also want to find your 2016 return (or your 2017, if you've completed it) to more accurately estimate your 2018 income, budget, expenses, and list of tax credits.

2. Provide general information and list potential tax credits

In the first two sections of the IRS Withholding Calculator, indicate your filing status, whether or not anybody can claim you as a dependent, how many jobs you and your spouse (if applicable) have, how many dependents you will claim on your return, and whether or not you or your spouse will be 65 or older on January 1, 2019.

Additionally, you will need to list any applicable tax credits, such as the Child Tax Credit and Earned Income Tax Credit. This is why it's helpful to have past returns handy to help you estimate those credits. (See also: 8 Tax Return Mistakes Even Smart People Make)

3. Detail your wage income and withholding

Next, enter your gross wages, salaries, tips, and any bonuses you expect to receive in 2018. Using your most recent pay stubs, enter the total federal income tax withheld to date in 2018 and the federal income tax withheld from your last salary payment. Indicate how frequently you receive your paychecks, and, if applicable, when you started this job in 2018, and when you expect this job to end in 2018.

If you receive any other taxable income, make sure to include it as well. The IRS Withholding Calculator is only as accurate as the information you enter, so leaving that income out may result in a higher tax liability.

4. List deductions

Here is one of the biggest changes implemented by the Tax Cuts and Jobs Act. If your standard deduction ($12,000 for individuals, $18,000 for heads of household, and $24,000 for married filing jointly) is more than your total itemized deductions, your standard deduction will be used to calculate your withholding. Otherwise, your total itemized deduction amount will be used. So, this is why it still pays to keep track of all of those deductions throughout the year.

Use your latest return to estimate your 2018 itemized deductions, including medical and dental expenses, paid taxes (up to $5,000 for single filers and $10,000 for married filers for applicable state and local income taxes, property taxes, or sales taxes), gifts to charity, and other itemized deductions. Remember that beginning in 2018, job and certain miscellaneous expenses are no longer deductible. (See also: 12 Things You Should Know About the New Tax Law)

5. Adjust your W4

Once you have entered all the data, the IRS Withholding Calculator will provide you with clear instructions on how to update your W4 with your employer. Depending on your situation, some action items may include changing your filing status, adjusting your number of allowances, and withholding an extra amount every paycheck.

Following the instructions from the calculator, you'll cover your tax liability just right.

Revisit the IRS Withholding Calculator as necessary

Don't set it and forget it. If your job (Promotion? Salary bump? Side gig?) or life situation (Married? Baby?) changes, revisit the IRS Withholding Calculator. The calculator will help you make sure you have the right amount of tax withheld from your paycheck at work.

The IRS recommends submitting your updated W4 to your employer as soon as possible. Withholding takes place throughout the year, so it's better to take this step right away.

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