If you’ve ever had a tax season surprise and received a smaller than usual refund, or maybe even had to pay taxes, you may have wondered what happened.
Withholding may be the number-one reason for filers seeing either an unexpected refund amount or owing money at tax time.The IRS website encourages people to periodically complete a “paycheck checkup” and adjust their withholding accordingly, especially when your employment, income, or family situation has changed.
The checkup can help identify how these changes should affect your withholding and even how withholding adjustments could impact the money you either receive or owe at tax time.
This brings up an important point: Getting a refund may seem like a good thing. But it actually means you over-withheld from your paycheck and gave the government an interest-free loan.
While it’s understandable to look forward to a tax refund, that’s an inefficient saving strategy. It’s generally best to withhold just enough to cover your tax bill or even to owe a little bit when you file your tax return. In the end, your total taxes due is the number you should really be paying attention to instead of focusing on whether you received a refund or owe additional taxes on Tax Day.
So, consider checking your withholding once or twice a year to stay on track to a targeted amount. If you haven’t run the numbers, you can use the IRS withholding calculator or meet with a tax professional to determine the correct withholding you need to help meet your goals.
Then, update your W-4 and provide your employer with the updated document. You also want to be sure that you don’t end up under-withholding too much,which could result in penalties.
