The federal income tax is a pay-as-you-go tax. Taxpayers pay the tax as they earn or receive income during the year. Taxpayers can avoid a surprise at tax time by checking their withholding amount. Did you file your federal tax return and were surprised to find you owed money? You might want to adjust your withholding so that this doesn’t happen when you file your 2020 taxes. You should even consider doing this if you got a big refund. Receiving a tax refund essentially means you’re giving the government an interest-free loan.
Understand tax withholding
An employer generally withholds income tax from their employee’s paycheck and pays it to the IRS on their behalf. Wages paid, along with any amounts withheld, are reflected on the Form W-2, Wage and Tax Statement, the employee receives at the end of the year.
Review and possibly adjust
The IRS is advising taxpayers to review their tax situations for this year and adjust withholding, if appropriate.
The tax agency has a withholding calculator to assist you in conducting a paycheck checkup. The calculator reflects tax law changes in areas such as available itemized deductions, the increased child credit, the new dependent credit and the repeal of dependent exemptions.
Changes to withholding may be needed if…
There are some situations when you should check your withholding. In addition to tax law changes, the IRS recommends that you perform a checkup if you:
- When life changes occur:
- Lifestyle – Marriage, divorce, birth or adoption of a child, home purchase, retirement, filing chapter 11 bankruptcy
- Wage income – The taxpayer or their spouse starts or stops working or starts or stops a second job
- Taxable income not subject to withholding – Interest, dividends, capital gains, self-employment and gig economy income and IRA (including certain Roth IRA) distributions
- Itemized deductions or tax credits – Medical expenses, taxes, interest expense, gifts to charity, dependent care expenses, education credit, Child Tax Credit, Earned Income Tax Credit
You can modify your withholding at any time during the year, or even multiple times within a year. To do so, you simply submit a new Form W-4 to your employer. Changes typically go into effect several weeks after a new Form W-4 is submitted. (For estimated tax payments, you can make adjustments each time quarterly estimated payments are due. The next payment is due September 15.).
Plan ahead now
There’s still time to remedy any shortfalls to minimize taxes due for 2020, as well as any penalties and interest. Please contact your ALL tax advisor or call us at 617-738-5200 with any questions.
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