Time to Check Your Withholding
Have your personal circumstances changed lately -- have you gotten married, had a child, bought a house? If so, it may be an appropriate time for you to review your withholding.
The IRS offers workers the opportunity to perform a quick "paycheck checkup" to make sure they have the right amount of tax withheld from their paychecks. The IRS Withholding Calculator can be found at irs.gov/individuals/irs-withholding-calculator.
Getting it right is important since you could face an unexpected tax bill or penalty at tax time next year if you have too little tax withheld. Or, if you have too much tax withheld, you may be eligible for a tax refund. Many people see a large tax refund as a plus -- but in reality, a large tax refund is effectively an interest-free loan of taxpayer money to the IRS. A better approach may be to have less tax withheld up front and receive more in your paycheck. That way, the extra money would be available to save or invest, pay down debt, or spend as you see fit.
The withholding calculator can help you figure out if you need to give your employer a new Form W-4, Employee's Withholding Allowance Certificate. Your results from the calculator can be used to help you fill out the form and adjust your income tax withholding.
Steps to Take
The key is to plan ahead. Before you access the calculator and start entering data, the IRS suggests that you:
- Have your most recent pay stubs within reach.
- Have a copy of your most recent income tax return available. A copy of your completed Form 1040 can assist you in estimating your 2020 income and identifying other items that may affect your tax.
The IRS cautions that the calculator's results will only be as accurate as the information you enter. If there is a change to your circumstances during the year, you will have to use the calculator again to ensure that your withholding is still correct.
Moreover, the IRS withholding calculator may not work for those with more complex tax situations. Taxpayers who owe self-employment tax, alternative minimum tax, the tax on unearned income of dependents, or certain other taxes and those with long-term capital gain or qualified dividends should use the instructions in Publication 505, Tax Withholding and Estimated Tax.
If you have questions about your withholding or would like assistance with analyzing your tax situation, consult with your tax professional.
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