45% of American Taxpayers Have No Idea When They Last Updated Their Withholding: AICPA W-4 Survey

Many American taxpayers havent caught up with the latest changes in the redesigned W-4, which the IRS released a year ago, putting them at risk for an unexpected tax bill next April. In fact, nearly two in five (37 percent) American taxpayers admit they arent even familiar with the W-4, including 11 percent who say theyve never heard of it. Thats according to new research conducted by The Harris Poll on behalf of the American Institute of CPAs (AICPA).

There have been a number of changes to withholdings over the past 3 years and weve found that many Americans havent been making adjustments accordingly. Inaccurate withholding can lead to an unpleasant surprise come Tax Day, said Gregory J. Anton, CPA, CGMA, chairman of the AICPAs National CPA Financial Literacy Commission. And with many individuals in a financially precarious position, its more important than ever to understand how withholding impacts your cash flow and overall financial situation.

Nearly One Year Later, Few Americans Have Updated W-4

The W-4 is an important form that employees fill out to accurately calculate how much federal tax to withhold from each paycheck. The new Form W-4 no longer includes allowances and makes it easier to coordinate across multiple jobs and with a spouse. Unfortunately, research shows that many American taxpayers arent keeping up with these changes, which directly impact their personal finances. Only 1 in 4 tax-filing Americans (26 percent) have updated their withholding since the IRS released the new redesigned W-4 in late 2019. And only 16 percent made changes to their form after the Tax Cuts & Jobs Act (TCJA) revised withholding tables in early 2018. While 14 percent last updated their withholding before either of these major changes. Most concerning, nearly half (45 percent) of tax-filing Americans have no idea when they last updated their withholding.

When 2018 taxes were filed in 2019, many news articles noted that Americans were confused when they didnt receive a tax refund. TCJA lowered tax rates across income levels helping to reduce Americans’ income tax burden but because it also updated withholding tables, many didnt 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, added Anton. This underscores why understanding and updating your tax withholding is so important– it directly impacts your budget.

Inaction Can Lead to an Unpleasant Tax Surprise

There is no IRS requirement for American taxpayers to submit the new W-4, unless requesting a change to their withholding or starting a new job. However, it may be advantageous to revisit the new W-4 to make sure current withholding is accurate, especially if ones personal or financial situation has changed, such as taking on a second job, or getting married. When asked about their federal income tax withholding strategy, less than half of all tax-filing Americans (44 percent) said it was their goal to pay as close to the exact amount as possible. Conversely and concerningly, more than half of tax-filing Americans (56 percent) said they are purposely paying an inaccurate amount of taxes throughout the year. Of these, a majority (71 percent) prefer to overpay and receive a refund, and 29 percent prefer to underpay and dont mind a bill.

Regardless of strategic intention, many Americans seem to be missing the mark. In the last three years, nearly 3 in 10 tax-filing Americans (28 percent) claim to have received an unusually large tax bill or tax refund.

I Owe How Much?!

If you dont deduct enough money from your paycheck, you can receive an unpleasant tax bill, or worse a penalty. In the past 3 years, 2 in 10 tax-filing Americans (19 percent) claim to have received an unusually large tax bill. Of these, 2 in 5 (39 percent) were extremely or very surprised. Those receiving a large bill commonly were concerned (34 percent), frustrated (33 percent), disappointed (32 percent) and angry (28 percent).

According to IRS 2019 tax-year filing statistics through late July 2020, the average tax bill for American taxpayers who owe money at the time of filing is $5,527*. Yet, two in five tax-filing Americans (39 percent) arent confident they could pay a $3,000 tax bill on short notice without using a credit card or borrowing money.

Whether you are going to have a bill, or a refund come Tax Day 2021 you should know now. To get an early estimate on what taxes you will owe based on your current withholding and what you earn, the IRS has a free Tax Withholding Estimator. By using this tool, Americans can take their recent pay stubs and get a general idea of whether to expect a refund or plan for a bill. Then, they can take this information and decide if adjusting their withholding makes sense for their financial plan.

Tax Day doesnt have to be a surprise. With better planning, a tax bill can be predictable, said Kim Hardy, CPA, member of the AICPAs National CPA Financial Literacy Commission. If you havent done so already, the end of the year is a great opportunity to review your current withholding and start 2021 off right. If you know ahead of time that you will owe when you file, you put a plan in place and budget accordingly.

A Tax Refund Is Good, Right?

If you deduct more money from your paycheck throughout the year than youll owe when filing taxes, you will likely receive a tax refund. In the past 3 years, 1 in 10 tax-filing Americans (11 percent) claim to have received an unusually large tax refund. Of these, over 2 in 5 (43 percent) were extremely or very surprised. A large tax refund often left American taxpayers feeling excited (43 percent), confident (35 percent), and relieved (27 percent).

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. 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 youll 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, added Hardy.

Tax Surprise Coming!

There are specific people who need to review and make changes to their withholding as well as plan for Tax Day 2021. There are many factors that make this tax year unique, including the large number of Americans who received unemployment assistance for the first time, which the federal government taxes as ordinary income. For complicated tax situations, work with a CPA.

For Americans looking for help understanding Form W-4, and the impact of changing their payroll deductions, the AICPA has information at 360FinancialLiteracy.org/W4. Understanding the impact of withholding is especially important for those looking to plan and improve their financial situation.

Americans Overconfident in W-4 Knowledge

Nearly two-thirds of American taxpayers (63 percent) consider themselves very or somewhat familiar with Form W-4. But when quizzed on some basic facts, only one in ten (11 percent) had all the right answers.

Statement

American taxpayers

who correctly identified

the statement

American taxpayers who

incorrectly identified the

statement or said

they didnt know.

W-4 forms can only be updated once a year. (FALSE, you can update throughout the year)

33%

67%

If spouses are both employed, only one spouse needs to complete a W-4 form. (FALSE, each employed spouse should complete a W-4)

48%

52%

Filling the W-4 form out incorrectly can trigger an IRS penalty for underpayment. (TRUE)

56%

44%

The IRS has a free online tool to help Americans estimate their W-4 amount. (TRUE)

62%

38%

Updates to the W-4 form are recommended for certain life changes, like having a child. (TRUE)

68%

32%

The W-4 form should be coordinated on all jobs for accurate tax withholding. (TRUE)

72%

28%

*IRS Mid-July Filing Season Statistics by AGI, divided B87 (Amount of Tax due at time of filing: $140,153,288) by B86 (number of returns: 25,356,715) multiplied by 1,000 (money amounts on the table are in thousands of dollars) to get $5,527.

Methodology

This survey was conducted online within the United States between October 1-5, 2020 among 2028 adults (aged 18 and over) by The Harris Poll on behalf of AICPA. Responses are for the 1,636 who have filed income taxes in the past 3 years. For complete survey methodology, including weighting variables and subgroup sample sizes, please contact [email protected].

About the AICPAs 360 Degrees of Financial Literacy Program

The AICPAs 360 Degrees of Financial Literacy Program is a nation-wide, volunteer grass-roots effort to help Americans develop a better understanding of money management and take control of their financial lives. Since 2005, the AICPA has been empowering people to make better decisions with the tools and resources on the 360 Degrees of Financial Literacy website. Financial Literacy is the cause of the CPA profession and the 360 Degrees of Financial Literacy program is the AICPAs flagship corporate social responsibility effort. These efforts are focused on financial education as a public service and are completely free from all advertising, sales, and promotions. Connect on Facebook for tips, insights and motivation to keep your finances on track.

About the American Institute of CPAs

The American Institute of CPAs (AICPA) is the worlds largest member association representing the CPA profession, with more than 431,000 members in the United States and worldwide, and a history of serving the public interest since 1887. AICPA members represent many areas of practice, including business and industry, public practice, government, education and consulting. The AICPA sets ethical standards for its members and U.S. auditing standards for private companies, nonprofit organizations, and federal, state and local governments. It develops and grades the Uniform CPA Examination, offers specialized credentials, builds the pipeline of future talent and drives professional competency development to advance the vitality, relevance and quality of the profession.

Jonathan Lynch

212-596-6033

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James Schiavone

212-596-6119

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