Nobody loves receiving a surprise tax bill, and there is still time to take action if you have not paid enough taxes for 2024, according to experts. Generally, employees pay taxes through withholdings from their paychecks. Other revenue necessitates quarterly estimated payments. Overpayment usually results in a refund, but not paying enough results in a balance owed.
While the concept of tax withholding may seem straightforward, it's important to understand that the U.S. tax system operates on a "pay-as-you-go" basis. This means that taxpayers are expected to pay taxes on their income as they earn it throughout the year, rather than in one lump sum at the end. This system helps to ensure a steady flow of revenue for the government and prevents individuals from facing an overwhelming tax burden all at once.
Employees can utilize "back of the napkin math" to double-check 2024 withholdings, assuming their situation is comparable to 2023, according to Tommy Lucas, a certified financial planner and enrolled agent with Moisand Fitzgerald Tamayo in Orlando, Florida.
Here's how you do it.
You might begin by determining your total federal taxes paid in 2023, which are indicated on line 24 of your tax return. If your gross income and tax position haven't altered since last year, you're likely to owe the same amount in 2024, Lucas explained.
If you have paid around 75% of last year's total taxes by the end of September, "you're going to be pretty darn close, assuming everything is the same as the prior year," he added.
However, "there's a whole slew of things that can change" from year to year, such as a second job, increased income, divorce, marriage, or childbirth, which causes your tax status to shift, Lucas added.
It's worth noting that significant life events can have a substantial impact on your tax situation. For instance, getting married might allow you to file jointly, potentially lowering your overall tax burden. On the other hand, a divorce could lead to a change in filing status and affect deductions and credits you're eligible for. Similarly, the birth of a child could qualify you for additional tax benefits, such as the Child Tax Credit. Being aware of these potential changes and adjusting your withholding accordingly can help prevent surprises come tax time.
In some cases, you'll need to conduct a more thorough examination to double-check your 2024 withholding, he explained. If your tax status has altered this year, experts advise you to use the IRS's free tool known as the "tax withholding estimator."
The tool considers your marital status, dependents, number of employment, other sources of income, most recent pay stub, taxes withheld, projected tax payments, and other information. After entering your information, the IRS generates a pre-filled Form W-4, which you may then give to your employer to increase or decrease your withholding.
While the IRS tax withholding estimator is a valuable resource, it's important to remember that it's just one tool in your tax planning arsenal. For those with more complex financial situations, such as self-employed individuals or those with significant investment income, consulting with a tax professional might be beneficial. They can provide personalized advice and help you navigate the intricacies of the tax code, potentially uncovering deductions or credits you might have overlooked.
Lucas suggested that you might make direct payments to the IRS to address your 2024 tax deficiency. Either way, "you've got to keep an eye on it," or you could face an unexpected tax bill, including penalties and interest, according to Mark Steber, chief tax information officer at Jackson Hewitt.
What To Expect After Updating Your Withholding
If you modify your tax withholding on Form W-4, make sure the change is accurate and reflected in future paychecks until the end of the year, Lucas said.
However, your withholding should be temporary until 2024, and you will need to file Form W-4 again in January, he advised. Otherwise, you may withhold too much until 2025.
It's crucial to understand that tax planning is an ongoing process, not a one-time event. As your financial situation evolves throughout the year, it's wise to periodically reassess your withholding. This proactive approach can help you avoid both underpayment penalties and overpayment, which essentially amounts to giving the government an interest-free loan. By staying on top of your tax situation, you can ensure that you're paying the right amount throughout the year, leading to fewer surprises and a smoother tax filing experience when April rolls around.
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