If you were unhappy or surprised with your tax return (or lack thereof) this year, the IRS has a new tool on their website you should know about! The Withholding Estimator allows you to adjust your withholding by performing a Paycheck Checkup. The Withholding Estimator gives specific recommendations on how to fill out their employer’s online Form W-4 or even provides the actual form filled out for you.
Figuring estimated tax withholdings have become more complicated as taxpayers switch jobs mid-year, get married, start a family, purchase a home, partake in the gig economy or have investment income. Starting in 2020, income tax withholding is no longer based on marital status and withholding allowances. Income tax withholding is now based on the worker’s filing status and expected tax deductions and tax credits for the year.
For those working more than one job at a time (including families in which both spouses work) it is important to adjust your withholding to avoid having too little withheld as this subjects the taxpayer to penalties. Using the new Tax Withholding Estimator is the most accurate way to accomplish this. The Estimator will calculate and suggest having your employer withhold an additional flat-dollar amount each pay period to remedy your tax short fall.
To get started using the Withholding Estimator, you will need quite a bit of your personal tax information handy and that for your spouse if married. Specifically, you need a copy of your most recent paystub, annual salary, and amounts contributed to retirement plans and health savings accounts. Additionally, you will need your projected investment income, capital gains, self-employment and rental income. The goal is to provide the Estimator as much relevant information as possible so it can calculate your year end tax liability accurately. The tool with then tell you how much additional tax is needed to be withheld by your employer so that no taxes are due upon filing your return.
In lieu of having your employer withhold more, you can always send in estimated tax payments to the IRS. These payments are made quarterly on April 15th , June 15th , September 15th and January 15th for income earned during the previous corresponding quarter. Use of estimated tax payments is typical where one spouse earns significant self-employment income and does not have income subject to withholding.
On occasion, I prepare a tax return with an unusually large refund due. While this is generally good news, this means the taxpayer has given the government an interest free loan and lost the opportunity to use this money sooner. For example, the taxpayer could opt to make larger payments on his mortgage, saving in interest charges. Once instance might be if the taxpayer has significant tax credits or carryforwards due, resulting is a tax which is far less than the amount being withheld from wages.
If you owed a lot of money to IRS with the filing of your taxes or received an unusually large refund, feel free to contact a tax attorney to discuss your options including making estimated tax payments and adjusting your wage withholding for next year. This will help alleviate any surprises at the end of the year and minimize penalties for underpayment of taxes.