You can almost hear the collective sigh of relief across the country; tax season is over. But is it? Now that you’ve filed your return, it's easy to forget about taxes until next year. If your 2022 tax return had you owing money or receiving a big refund, now is the time to make adjustments to your federal tax withholding so that your 2023 return does not yield the same result.
What is Withholding?
It’s something that you do when you start a new job, and likely never think about again. You’ll be asked to fill out a W-4 form telling your employer how much federal income tax to withhold from your paycheck. Your options regarding the amount withheld will be based on your marital status, number of dependents, and other factors.
Your employer will then send the withheld money to the IRS on your behalf. At the end of the year, you'll receive a W-2 form that shows how much money was withheld from your paycheck for federal taxes.
Why should you check your withholding?
It's important to check your withholding to make sure you're not overpaying or underpaying your taxes. If you're overpaying, you're essentially giving the government an interest-free loan. If you're underpaying, you could end up owing a large sum of money at tax time.
The IRS recommends that you check your withholding anytime there are changes in your life that may affect your taxes. For example, if you get married or divorced, have a child, or buy a house, you may need to adjust your withholding.
How to check your withholding
The IRS has a very useful and user-friendly withholding calculator https://www.irs.gov/individuals/tax-withholding-estimator, that can help you determine how much federal income tax to withhold from your paycheck. You'll need to gather your most recent pay stub and your most recent tax return to use the calculator.
The calculator will ask you a series of questions about your income, deductions, and credits. Based on your answers, it will provide a recommended withholding amount for your next paycheck.
The calculator is not designed to be used if you have a pension but not a job; you have nonresident alien status; or your tax situation is complex. This includes alternative minimum tax, long-term capital gains, or qualified dividends.
Once you have the recommended withholding amount, you'll need to fill out a new W-4 form and give it to your employer. You can download the form from the IRS website. https://www.irs.gov/pub/irs-pdf/fw4.pdf
It may be the end of tax season for now, but it’s not the end of your responsibility to make sure you’re not overpaying or underpaying your taxes. Checking your withholding is an important step in managing your finances so that you’re on track for a successful 2023 tax year.
Your One Financial Services Advisor will be pleased to discuss your options to maximize your tax savings.