When it comes to taxes, the last thing anyone wants is an unanticipated bill from the IRS. As we progress through 2024, many taxpayers find themselves grappling with the consequences of previous withholdings, or perhaps lack thereof. Understanding how to assess your tax obligations and adjust accordingly is crucial to prevent unwelcome surprises when tax season arrives.
For most employees, taxes are automatically deducted from each paycheck—this is known as withholding. This system is designed to make tax payments more manageable, spreading the burden throughout the year rather than presenting it all at once during tax season. However, other types of income, such as freelance earnings or rental income, require individuals to make estimated quarterly payments to the government.
While many find themselves in a situation where they are due a tax refund due to overwithholding, others may be caught off guard with a tax liability if their withholdings fall short. This situation underscores the importance of proactively managing your tax withholdings as the year progresses.
As a financial strategy, many experts suggest performing a quick estimation of your tax obligations for 2024 by reflecting on your previous year’s tax situation. Tommy Lucas, a certified financial planner based in Orlando, Florida, emphasizes the potential for a surprisingly accurate assessment using “back of the napkin math.” To start, you would need to refer to your 2023 tax return, specifically line 24, to discover the total federal taxes you owed. If your income and financial circumstances have remained consistent, there’s a good chance that your tax liability for 2024 will mirror that of the previous year.
Next, reviewing your pay stubs is essential. Lucas notes that if you have withheld approximately 75% of last year’s taxes by the end of September, you’re likely doing okay. However, a multitude of factors can cause significant changes in one’s tax situation over time. Life events such as marriage, divorce, the birth of a child, or even just adding a side job can dramatically shift your taxable income, thereby affecting your overall tax withholding needs.
For individuals facing a dynamic financial landscape, experts recommend utilizing the IRS’s free “Tax Withholding Estimator.” This online tool considers a variety of factors including your marital status, number of dependents, additional sources of income, and your most recent pay stub. After entering your details, the estimator generates a pre-filled Form W-4. This allows you to adjust your withholdings accordingly by submitting the updated form to your employer.
Moreover, if you expect a shortfall in your 2024 tax payment, you also have the option to make direct payments to the IRS to mitigate your liability and avoid penalties. Mark Steber, the chief tax information officer at Jackson Hewitt, warns that keeping tabs on your withholdings is essential to preventing unforeseen bills and accruing interest on any unpaid taxes.
If you opt to alter your withholdings via Form W-4 after using the estimator, it is crucial to ensure that the changes are accurately reflected in your future paychecks. It’s important to view these adjustments as temporary—commonly meant to carry you through 2024. As the new year rolls around, taxpayers must reassess their situations and potentially resubmit Form W-4 to ensure their withholding aligns with their financial reality.
Being proactive about your taxes can safeguard you from the frustration of surprise bills come tax season. By frequently reviewing your tax situation, leveraging available tools, and making informed adjustments, you can navigate your financial obligations with greater ease and peace of mind. Remember, taxes may feel complex, but with careful planning and attention, they don’t have to be overwhelming.
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