Time for a Tax Checkup
As we enter mid-year, it's a good time to check your tax withholdings to ensure you haven't been paying too much or too little. This is especially true if your income was impacted by the pandemic or you have a change to your marital status, or number of dependents.
This quick checkup will ensure you are not surprised with a large tax bill when you file your income tax return.
Get a rough estimate
The IRS has an online tool that will help you calculate how much your current withholdings match what your final tax bill will be. In order to get an accurate reading, you need to have a copy of your latest paycheck or last quarterly estimated tax filing (Form 1040 ES). It may also help to have your last tax return on hand if you expect to take similar credits and deductions this year.
The IRS tool is here: IRS Withholding Calculator
Enter your data, including your filing status, dependents and any information about credits. Then refer to your last paycheck or withholding statement and enter in your total withholdings so far this year. Also enter what you expect to earn by year-end.
After you enter your information, the tool print a result and provide a estimate of your under or over withholding for tax. But remember, this tool is a rough estimate. If you are concerned about your situation it is always best to ask for help to get a better read or run through alternative scenarios.
How to fix a problem
Whether you're paying too much or too little, you can fix it by filling out a new W-4 form and giving it to your employer. If you do so, you'll have to file another W-4 at the start of 2022 to return your withholding schedule to normal. If you're filing quarterly estimated taxes, you can adjust your next quarter's estimate in a similar way.
Why a checkup is important
In a perfect world, you would not owe too much nor get too large a refund. Unfortunately, the federal government refunds more than $3,000 a year to the average taxpayer. Think of that money as an interest-free loan the government borrowed from you. Conversely, a shortfall means writing a large check when you file your tax return. That's a surprise few of us need.