Date: 2018-02-28

By 

Richard Rubin

Updated Feb. 28, 2018 7:32 p.m. ET

WASHINGTON—Taxpayers may now use an IRS tool to determine how much they should have withheld from their paychecks under the new tax law.

The Treasury Department on Wednesday released an updated online calculator that allows taxpayers to input their financial information and estimate 2018 income tax liability. It allows a more fine-tuned calculation than the changes to withholding tables that employers have been implementing.

Taxpayers don’t supply their names or identifying information to the calculator. They can take the results and file an updated Form W-4 with their employer.

Many taxpayers will find that their existing withholding is sufficient and they don’t need to make changes, said David Kautter, acting commissioner of the Internal Revenue Service.

Mr. Kautter encouraged taxpayers with extensive itemized deductions or two earners in the household to use the calculator. The tool is primarily designed for wage-earners, he said, though there is a way to include nonwage income.

The old withholding system was based in part on personal exemptions, the deduction available for each person in a household that was $4,050 in 2017. But the new tax law that took effect in January removes those exemptions, nearly doubles the standard deduction, changes tax rates and doubles the child tax credit.

For most households in 2018, income taxes are going down and take-home pay should go up as a result. According to the Tax Policy Center, as a result of the individual income tax changes, 65% of households will get a tax cut while 6% will pay more.

Changes in withholding directly affect the size of a taxpayer’s refund. For many households, that annual payment is the year’s largest financial event, even if it’s technically the result of a no-interest loan to the government.

In 2017, about 74% of tax filers received refunds averaging $2,895, according to IRS data. If the withholding tables or the calculator encourage people to align their withholding more closely with their tax liability, the refund pattern that leads to major purchases and debt payments every February and March could be disrupted in 2019.

The example Mr. Kautter walked through for reporters provided a default calculation that would reduce a sample household’s refund from $1,510 to $275—putting more than $1,000 back in workers’ paychecks over the course of the year. Still, Mr. Kautter said the government isn’t taking a position on how much taxpayers should hand over—as long as they have enough withheld to comply with the law.

“Some taxpayers prefer to have that big refund in April,” he said, “but just knowing the facts, we think, would be helpful.”