As we approach the end of the year, we’re not only looking back, but also looking forward. And you should be, too—right to your next paycheck checkup.
Soon enough, we’ll be talking about ways to help reduce your tax debt or boost your savings in the New Year. We’ll provide end-of-year tax checklists and share other tools that can help you get a better handle on your taxes.
Tax debt doesn’t just spring out of thin air; it also doesn’t stem from intentional tax fraud or tax evasion. Sadly, it’s usually the result of unintentional omission or a lack of organization or preparedness. Tax debt often stems from unfiled tax returns, misreported income, or unexpected tax bills that are just too big to pay all at once.
Fortunately, the fall months around the tax extension deadline provide a prime opportunity to reexamine your income and tax situation to get a jumpstart on the new tax year! One of the primary methods of tackling this is by adjusting your tax withholding.
Short answer: You may not need to.
But you also might! Simply put, your withholding is the amount of your paycheck withheld by your employer for tax purposes. Assuming you aren’t self-employed or a contractor, you’ll typically see a breakdown on your paychecks indicating which money was withheld for your federal and state taxes. This amount is determined based on how you fill out your W-4 when you’re first hired.
Sadly, a lot of taxpayers don’t really know how this form really impacts their taxes. This leads to withholding issues that can result in unexpected tax bills when it’s time to file! So, while most taxpayers don’t run into an out of control tax bill, it’s a lot more likely that you’re off than you may think.
On top of this, changes in your life circumstances tangibly impact whether your tax bill is correct or not. Among many other life changes, should you have a child, get divorced, or buy a home, you may end up experiencing a change in your tax obligation—and that will knock your withholding off course. That could result in an unexpected tax bill, or on the other hand, a surprisingly large tax refund that you really could have benefitted from staying in your paychecks, instead.
Think of a paycheck checkup like you think of a checkup with your doctor or auto mechanic. You’re checking up on your current withholding to determine whether you’re in good shape or whether you should make adjustments.
Much like a medical checkup, you should check in on your tax withholding about once a year or following any significant life change. For example, if one of your dependents moves away to college and you’ll no longer be financially supporting them in some way, it could mean you owe more in taxes.
Fortunately, if you do find that something is off with your current tax withholding, you can update your W-4 with your employer at any time. Typically, whoever at your employer (HR, payroll, etc.) handled your documentation the first time you signed your contracts and filled out your W-4 will be able to help you update your withholding.
This will ensure that your paychecks begin reflecting your new withholding, so if you’re married, it’s good to discuss the change with your partner in case you need to budget for it.
Fortunately, when it’s time for you to perform your paycheck checkup, you won’t have to go it alone. The IRS actually provides a tool on their website to help!
The Tax Withholding Estimator (linked below) always reflects current applicable tax laws for taxpayers. According to the IRS, here’s what you’ll need to do:
There’s more detailed information on the IRS’s website, where you can try the Tax Withholding Estimator. It can give you a sense of how accurate your current tax withholding is. Should you learn you’re withholding too much or too little, you can take steps to update your W-4.
Remember: Your results are only as accurate as the information you input. If you do too much rounding or omit a spouse’s income, you may not get a completely accurate picture.
We admit that heading might be a stretch, but the sentiment rings true. A regular paycheck checkup helps to ensure you’re hitting the tax withholding you want to. And it also helps you avoid the surprise of an unwanted tax bill when April rolls around. However, if you still find yourself dealing with unexpected tax debt, you shouldn’t go it alone. Get the experienced help you need today.
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