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Financial Planning > Tax Planning

Nearly Half of Taxpayers Don't Know When They Last Updated Their W-4: AICPA

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Many Americans are at risk for an unexpected tax bill in April because they aren’t aware of the latest changes in the redesigned W-4, which employees fill out to accurately calculate how much federal tax to withhold from each paycheck, the American Institute of CPAs reported Tuesday.

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A survey conducted by The Harris Poll showed that 37% of taxpayers were not familiar with the W-4, including 11% who said they had never heard of it.

“Inaccurate withholding can lead to an unpleasant surprise come Tax Day,” Gregory J. Anton, chairman of the AICPA’s National CPA Financial Literacy Commission, said in a statement.

“And 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.”

The new Form W-4, which the Internal Revenue Service released late last year, no longer includes allowances and makes it easier to coordinate across multiple jobs and with a spouse.

But only 26% of Americans surveyed said they had updated their withholding since the IRS released the redesigned W-4, and only 16% had made changes to their form after the Tax Cuts and Jobs Act revised withholding tables in early 2018. Fourteen percent of respondents said they had last updated their withholding before either of these major changes.

Worst of all, 45% of tax filers had no idea when they last updated their withholding.

When 2018 taxes were filed in 2019, many Americans were reportedly confused when they did not receive a tax refund, according to the report. The new tax law lowered rates across income levels helping to reduce Americans’ income tax burden, but because it also updated withholding tables, many did not get the refunds they had come to expect.

“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,” Anton said. “This underscores why understanding and updating your tax withholding is so important — it directly impacts your budget.”

Related: Human Capital: Why Ed Slott Thinks Taxes Are Heading ‘Through the Roof’

The Harris Poll conducted the online survey between Oct. 1 and Oct. 5 among 2028 adults within the U.S. Responses are for the 1,636 who have filed income taxes in the past three years.

Consequences of Inaction 

Although the IRS does not require American taxpayers to submit the new W-4 unless they are requesting a change to their withholding or starting a new job, revisiting the form to ensure the current withholding is accurate can be advantageous, especially if one’s personal or financial situation has changed, the AICPA said.

When asked about their federal income tax withholding strategy, only 44% of taxpayers said it was their goal to pay as close to the exact amount as possible. Fifty-six percent said they purposefully pay an inaccurate amount of taxes throughout the year.

Of these, 71% prefer to overpay and receive a refund, and 29% prefer to underpay and do not mind a bill.

Regardless of strategic intention, 28% of tax-filing Americans claim to have received an unusually large tax bill or tax refund in the last three years, the survey found.

According to the AICPA, those who do not deduct enough money from their paycheck can receive a tax bill or, worse, a penalty. In the past three years, two in 10 tax filers claimed to have received an unusually large tax bill.

Of these, two in five said they were extremely or very surprised, and felt variously concerned, frustrated, disappointed or angry.

According to IRS 2019 tax-year filing statistics through late July, the average tax bill for American taxpayers who owe money at the time of filing was $5,527. Yet 39% of survey participants said they were not confident they could pay a $3,000 tax bill on short notice without using a credit card or borrowing money.

Those who deduct more money from their paycheck throughout the year than they will owe when filing taxes will likely receive a tax refund. One in 10 tax filers claim to have received an unusually large tax refund in the past three years, the AICPA said. Two in five said they were extremely or very surprised, and felt excited, confident or relieved.

“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,” Kim Hardy, member of the AICPA’s National CPA Financial Literacy Commission, said in the statement.

“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.”

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