Tax season can often bring about unexpected challenges, especially when it comes to surprises in your tax bill. As we approach the end of 2024, it is essential to take proactive steps to ensure that you are not caught off-guard when it comes time to file your taxes. Tax experts highlight the importance of reviewing your withholdings and making adjustments as necessary to avoid any unwelcome surprises next April.
For the majority of employees, taxes are automatically withheld from paychecks, making the process relatively straightforward. However, not all types of income come with built-in withholdings. For instance, if you earn income through freelance work or investments, you may need to make estimated tax payments quarterly. Underwithholding during the year could lead to a hefty balance due when you file your tax return, which is an unwelcome surprise for many.
Tommy Lucas, a certified financial planner, emphasizes the need for individuals to periodically evaluate their tax withholdings. By analyzing the amount withheld from paychecks in relation to the previous year’s tax obligations, taxpayers can avoid falling into the trap of underpayment. This process can be simplified through basic calculations—often referred to as “back of the napkin math”—which can provide a quick glimpse into your tax situation for the current year.
To initiate this calculation, begin by identifying the total federal taxes you’ve paid in the last year. This figure can typically be found on line 24 of your tax return. If your gross income and overall tax situation have remained stable since 2023, there is a high likelihood that you will owe a similar amount in 2024. For many, this conservative approach offers a foundation for determining if your withholdings are on par.
Next, review your pay stubs. If you have managed to pay approximately 75% of last year’s total tax obligations by the end of September, you may be considerably close to being on target for the current year. However, caution is advised; many variables could shift your tax situation unexpectedly. Life changes such as starting a new job, increasing your income, or experiencing significant personal events (like marriage or having children) may substantially impact your overall tax responsibility.
For those who have experienced changes in their tax situations this year or simply want a more precise analysis, the IRS offers a “tax withholding estimator.” This online tool is valuable for individuals seeking to understand their withholding needs based on several variables. By inputting information such as marital status, number of dependents, and other income sources, the estimator generates recommended adjustments to your Form W-4.
Upon utilizing the estimator, it is vital to act on the results promptly. The IRS provides a pre-filled Form W-4 that can be presented to your employer to adjust how much tax is withheld from your paychecks. Alternatively, individuals can opt to make direct payments to the IRS in order to offset any projected tax deficits.
Mark Steber, chief tax information officer at Jackson Hewitt, reminds taxpayers to remain vigilant throughout the year. If you decide to make changes to your withholdings, verify that these adjustments are accurately reflected in your upcoming paychecks. It’s advised that you reassess your withholdings at the start of each new year to ensure continued accuracy.
Failing to keep an eye on your tax situation could result in unexpected tax liabilities or penalties. By taking the necessary time to review and adjust your withholdings now, you can alleviate potential stress come tax season. Proactive measures ensure that you remain compliant while avoiding a burdensome tax bill.
Avoiding surprise tax bills requires attentiveness and proactive management of your financial situation. By understanding your withholdings, utilizing available tools, and making necessary adjustments, you can take control of your tax obligations and lessen the risk of unforeseen complications. Tax time does not have to be fraught with anxiety—being informed and prepared can pave the way for a more manageable experience.