As tax season arrives, Americans are filing their returns and facing potential pitfalls due to last year’s tax withholding errors. This article aims to shed light on the consequences of these errors and provide guidance on avoiding unexpected tax bills. With the Internal Revenue Service (IRS) mandating tax payments throughout the year through automatic employer paycheck withholdings, understanding the potential risks is crucial.
For individuals with multiple jobs, withholding issues often come as an unwelcome surprise. Certified financial planner JoAnn May, also a certified public accountant, explains that when you earn income from different employers, each is likely to withhold taxes at a lower percentage due to their lack of knowledge about your combined earnings. This scenario can lead to underpayment of taxes and potential bills.
Another common situation that triggers withholding errors is changing jobs. Suppose an individual earned $100,000 from one employer during the first eight months of the year and an additional $50,000 from a different employer during the last four months. In this case, it is probable that the second employer did not withhold enough taxes. Such circumstances frequently result in individuals owing more in taxes than anticipated.
Life events can significantly impact tax withholding accuracy. People often fail to realize the importance of updating their Form W-4 with their employer following major life changes. Certified financial planner John Loyd, owner of The Wealth Planner, highlights how life events such as divorce, childbirth, job loss, or receiving unemployment income require adjustments to withholding. Failing to update your filing status or deductions can result in underpayment.
To prevent unwelcome financial surprises, experts recommend making withholding adjustments proactively. The IRS advises individuals to review and update their withholdings to avoid large refunds or balances due. While it is ideal to make these adjustments early in the year, regularly revisiting your withholdings throughout the year is crucial.
Navigating the complexities of tax withholding is essential to ensuring a smoother and more predictable tax season. By understanding the risks associated with withholding errors and taking necessary steps to update your withholding information, you can avoid unnecessary bills or excessive refunds. Remember, tax withholdings should not be a one-time task but an ongoing process to ensure accurate and manageable tax payments. Stay proactive and informed to mitigate surprises and achieve financial peace of mind during tax season.
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