Estimating Tax Withholding to Avoid Surprise Bills
As the end of the year approaches, many individuals start thinking about their tax situation and how to avoid any surprises come tax season. One way to estimate your tax withholding and prevent a hefty tax bill is by following a simple calculation, according to experts.
Lucas, a tax professional, suggests starting by looking at your total federal taxes paid for the current year, which can be found on line 24 of your tax return. If your income and tax situation have remained relatively stable from the previous year, you can use this amount as a baseline for estimating your taxes for the upcoming year.
It’s important to note that various life changes can impact your tax situation, such as getting a second job, experiencing a significant increase in income, going through a divorce, getting married, or having a child. In these cases, a more detailed analysis may be necessary to accurately estimate your tax withholding for the next year.
Using the IRS Tax Withholding Estimator
If you’ve experienced any significant changes in your tax situation, experts recommend utilizing the IRS tax withholding estimator, a free tool provided by the IRS. This tool takes into account factors such as your marital status, number of dependents, additional sources of income, recent pay stubs, taxes withheld, estimated tax payments, and other relevant details.
After inputting your information into the estimator, the IRS will generate a prefilled Form W-4 that you can then submit to your employer to adjust your withholding accordingly. Alternatively, you can make direct payments to the IRS to cover any potential tax shortfall for the upcoming year.
Mark Steber, chief tax information officer at Jackson Hewitt, emphasizes the importance of regularly monitoring your tax withholding to avoid unexpected tax bills, along with penalties and interest. Keeping an eye on your tax situation and making necessary adjustments can help you stay on top of your finances and avoid any unpleasant surprises.
Ensuring Accuracy and Consistency
After updating your tax withholding via Form W-4 or making direct payments to the IRS, it’s crucial to ensure that the changes are accurately reflected in your future paychecks until the end of the year. This will help you avoid withholding too much or too little for the current year.
Lucas advises that any adjustments made to your withholding should be viewed as temporary until the end of the current tax year. In January, it’s essential to reassess your withholding and submit a new Form W-4 to prevent over or under-withholding for the following year.
By staying proactive and vigilant about your tax situation, you can avoid facing unexpected tax bills and financial repercussions down the line. Taking the time to estimate your tax withholding accurately and making necessary adjustments can help you maintain financial stability and peace of mind.