As we enter into the fall months, it's a good time to check your tax withholdings to make sure you haven't been paying too much or too little. This is especially true if major changes took place in your life this year to your marital status, number of dependents, or your employment.
This quick checkup will ensure you are not surprised with a large tax bill when you file your income tax return. Fortunately, you still have a few months left to fix any problems.
Get an Accurate Assessment
The IRS has an online withholding calculator that will help you calculate how much your current withholdings match what your final tax bill will be. In order to get an accurate reading, you need to have a copy of your latest paycheck or last quarterly estimated tax filing (Form 1040 ES). It may also help to have your last tax return on hand if you expect to take similar credits and deductions this year.
Enter your data, including your filing status, dependents and any information about credits. Then refer to your last paycheck or withholding statement and enter in your total withholdings so far this year. Also enter what you expect to earn by year-end.
After you enter your information, the tool will output something similar to this:
Based on the information you previously entered, your anticipated income tax for 2017 is $15,145. If you do not change your current withholding arrangement, you will have $23,670 withheld for 2017 resulting in an overpayment of $8,525 when you file your return.
How to Fix a Problem
Whether you're paying too much or too little, you can fix it by filling out a new W-4 form and giving it to your employer. If you do so, you'll have to file another W-4 at the start of 2018 to return your withholding schedule to normal. If you're filing quarterly estimated taxes, you can adjust your next quarter's estimate in a similar way.
Why a Checkup Is Important
In a perfect world, you would neither owe too much nor get too large a refund. Unfortunately, the federal government refunds more than $3,000 a year to the average taxpayer. Think of that money as an interest-free loan the government borrowed from you. Conversely, a shortfall means writing a large check when you file your tax return. That's a surprise few of us need.