Tax season can be a source of anxiety for many, particularly when faced with the potential for unexpected tax bills. As we approach the end of 2024, it becomes imperative for taxpayers to assess their withholding status and ensure compliance with tax obligations. Financial experts emphasize that proactive measures can significantly mitigate the risk of a surprise bill once tax season arrives.
For most employees, taxes are automatically withheld from each paycheck. This streamlined process simplifies tax obligations for many, as the burden of large unpaid tax bills is alleviated throughout the year. However, individuals with other income streams—like freelance work or rental income—are required to make quarterly estimated tax payments. These differing requirements mean that financial planning must adapt to an individual’s specific situation.
An overpayment throughout the year often leads to tax refunds, which is typically viewed as a favorable outcome. Conversely, underpayment can create an unfortunate scenario where individuals find themselves with outstanding balances owed to the Internal Revenue Service (IRS)—and potentially in the position of owing penalties and interest if they fail to catch up before the tax deadline.
Tommy Lucas, a certified financial planner, suggests a straightforward method for verifying withholding amounts as the year comes to a close. For those whose financial circumstances remain unchanged from the previous year, a quick comparison can be conducted using last year’s tax return data.
Start by identifying the total federal taxes paid in 2023. This figure can be found on line 24 of the past year’s tax return. If your gross income and tax situation appear similar, it is likely that you can expect a comparable tax obligation for 2024.
Next, scrutinize pay stubs to determine if about 75% of the previous year’s tax total has been withheld by the end of September. Lucas indicates that this percentage is a strong indicator of whether one is on track with their withholding. However, real life can often throw unexpected changes into the mix.
Life events—such as marriage, divorce, the birth of a child, or taking on additional employment—can dramatically alter an individual’s tax landscape. In these cases, a simple back-of-the-napkin calculation may not suffice. Individuals experiencing changes in their financial circumstances should conduct a more precise analysis to reassess withholdings.
Using tools available from the IRS can help taxpayers gain clarity. The IRS offers a free “tax withholding estimator” that helps users input variables including marital status, number of dependents, and salaries from multiple jobs. Utilizing this tool not only provides a clearer picture of tax liability but also results in a precompleted Form W-4. This form can be used to adjust withholdings through your employer, ensuring a more accurate reflection of your tax responsibility.
Even after updating withholdings, maintaining vigilance remains crucial. Mark Steber, Chief Tax Information Officer at Jackson Hewitt, asserts the importance of tracking withholding changes. An ongoing assessment can prevent taxpayers from inadvertently unraveled financial management, which may lead to penalties for underpayment.
Once employees update their withholding via Form W-4, they must ensure that the adjustments are correctly reflected on future paychecks. Furthermore, it is essential to recognize that changes should be regarded as temporary for the current tax year. As the new year begins, resubmitting the W-4 form is a necessary step to maintain accurate withholding aligned with evolving financial circumstances.
Navigating tax withholding can seem daunting, but proactive measures allow individuals to take control of their financial situation. By reviewing past data, utilizing IRS tools, and staying informed about personal financial changes, taxpayers can significantly reduce the risk of unwelcome surprises come tax season. Being diligent is key to achieving peace of mind and fiscal responsibility throughout the year.
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