As you complete your tax return this year, are you surprised by the amount of your balance due or refund? Many people are unpleasantly surprised by the balance due. How can you prepare so that tax time is, if not pleasant, at least less painful?
The choices you make regarding your federal income tax withholding and estimated payments can impact your balance due or refunds. The IRS developed withholding tables to assist your employer in determining the correct amount of tax to withhold from your paycheck. The good news is that you can change your withholding whenever you want. By completing a Form W-4, you can take additional withholding each paycheck to minimize your balance due. If you’re not great at saving, taking $50 out of each paycheck in the last half of the year is often easier than coming up with $600 at tax time. In much the same way, you can make an estimated tax payment during the year. This is helpful if you have extra cash during the year.
How do you determine how much to withhold or pay? Generally, taxpayers do not incur an underpayment penalty unless they have a balance due (after deductions, credits, and payments) in excess of $1,000. We know the tax rates for 2020. If you bring in your paycheck closest to July 1, you can double the income and withholding to get approximate numbers for the full year. Together, we can go through your usual deductions and credits to determine the amount that you must withhold to get to where you want to be.
Make a yearly obligation to yourself to contact everyone involved with your financial and retirement future to review your withholding as well as your financial plan and goals. If you can make it happen, you will be very happy you did because you will know your plan is working or in need of adjustment and it will eliminate the guesswork for your future.