- If you received a surprise tax bill this tax season, it might be time to review your withholding tax.
- You can use the IRS’ free tax withholding estimator, but it may not work for “complex” situations, according to the agency.
- Experts suggest reviewing deductions throughout the year, especially after life events such as marriage or the birth of a child.
If you’ve had a surprise tax bill this season or your refund has been lower than expected, it may be time to review your payroll deduction.
The IRS collects taxes throughout the year, usually through payroll deductions for W-2 employees or estimated quarterly tax payments for the self-employed. You can expect a refund if you overpaid or a tax bill if you underpaid.
One way to avoid a 2023 tax bill is to use the IRS withholding tax estimator, according to Sheneya Wilson, a CPA and founder of Fola Financial in New York.
The free calculator shows how your current deduction affects your take-home pay, next year’s refund, or tax bill.
Review deductions “at least in the middle of the year”
Wilson tells his clients to recheck deductions “at least mid-year” or more often for those expecting larger payments throughout the year. “The calculator definitely lets taxpayers see if they’re on the right track,” he said.
However, you will need your most recent paycheck, preferably close to your last pay date for accuracy. “With bad information, you can do more harm than good,” Wilson said.
You should skip the calculator if “your tax situation is complex,” according to the IRS, such as alternative minimum taxpayers for higher income and some investment income.
“The most important thing is to take stock of what happened last year” and make the necessary adjustments, he added.
Common Reasons for Changing Deductions
You typically fill out Form W-4 when you start a new job, which tells your employer how much to withhold from each paycheck for federal taxes. But there are several reasons why the form may need to be updated and resubmitted to an employer.
For example, there may be family changes such as marriage, divorce or the welcoming of a child into the family, Wilson said. According to the IRS, other lifestyle changes, such as buying a home or major changes in income, can also affect next year’s taxes.
Top reasons to adjust your deduction:
- Changes in tax law
- Lifestyle changes such as marriage, divorce or children
- New jobs, secondary jobs or unemployment
- Shifts of deductions and tax credits
Of course, holdbacks can also stem from personal preferences, such as a desire to receive a refund each year, said certified financial planner Kevin Brady, vice president of Wealthspire Advisors in New York.
However, if you find you’re off track, “there’s always the option of making an estimated quarterly payment,” Brady explained.
As of April 7, the IRS has issued more than 69 million refunds, with an average payout of $2,878, more than 9% lower than the average refund at the same time last tax season.
This article was originally published in English by Kate Dore for our sister network CNBC.com. To learn more about CNBC, enter here.