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IRS warns taxpayers to check on their withholding

The Internal Revenue Service building in Washington, D.C.

The overworked IRS is grappling with the disbursement of child tax credit payments, reporter Chabeli Carrazana says. Jim Watson/AFP via Getty Images

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This spring, James and Kristen Dickey bought an SUV. It was a black Toyota 4Runner.

They were pumped. The Toyota would replace Kristen’s old car. It’d be easier with their two kids.

“She did the thing where she took a picture of her old Volvo, was like ‘Thanks for the great decade!’” James said. “And she was going to post it, you know. Like, she was all ready.”

Then the Dickeys got the letter from their accountant. They owed $6,500 on their 2017 taxes.

“We were pretty disappointed,” he said.

He had changed jobs that year and was making more money. That meant he no longer qualified for certain tax credits. So the amount of taxes that had come out of his paycheck — his withholding — wasn’t enough.  

And the Toyota? “Yeah, we had to return it,” he said. “It was a bummer.”

In the United States, we pay our taxes as we go. Every paycheck, your employer withholds some of your money and sends it to the government on your behalf. The amount is based on choices you make and on guidelines the Internal Revenue Service gives your company.

It’s a tricky balance. You don’t want to pay too much and give the government an interest-free loan. But you also don’t want to underpay and end up with a big tax bill in April.

That’s a risk for millions of Americans now that the tax code has changed.

The U.S. just underwent its most significant tax overhaul in a generation. Most people are getting a tax cut.

“The perception is that, ‘Oh, I’m not going to owe anything, you know, the tax rates went down, so that means I’m going to have a big refund,’” said Jonette Esquivias, director of accounting services at 1-800Accountant.

The reality is more complicated. Yes, tax rates went down. And when that happened, the IRS told companies to withhold less in taxes from people’s paychecks. So that tax cut? You’re getting it now.

At the same time, the new tax law got rid of or limited a lot of deductions you take at tax time.

Which means come April, you may find yourself in the same situation as the Dickey family — owing the government money.

“A lot of people will definitely have a nasty surprise when they file their returns,” Esquivias said.

The IRS has been warning people across every tax bracket to double check their withholding. There’s a calculator on its website where you can plug in your information.

Esquivias said her firm has been emailing clients, offering them free consultations.

“No one’s interested,” she said. “They don’t want to learn. They don’t want to know about, you know, whether or not they’re withholding or they’re underwithholding or overwithholding. Nobody cares.”

She said they’ll care when it’s time to write the check. And she’s worried they’re going to blame their accountants.

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