Did you unexpectedly owe the IRS money on your tax return this year? Or did you get a large refund? Now’s the time to fix that for next year’s Tax Day.
With 2020 tax returns now in the books for most of us, adjusting your withholding as soon as possible may spare you from a tax bill—or a refund—different from what you expect when you file taxes next year. Most people with an employer have federal income tax withheld from each paycheck. If that’s you, review it every year to ensure you’re having the correct amount of taxes taken out, the IRS wrote in a new Tax Tip on Wednesday.
Generally, you should increase the amount of federal income tax taken out of your paycheck if you hold more than one job at a time, or if you have income from sources not subject to withholding, the IRS said. You should decrease your withholding if you qualify for income tax credits or deductions other than the standard deduction that every tax filer receives. (If you’re wondering, by the way, receiving a refund from the IRS essentially means that you’ve given the federal government an interest-free loan for the year. That’s money that you could have otherwise used to pay bills, invest, or earn interest in a savings account.)
The IRS recommends checking your withholding if you:
- Have a spouse that is an employee
- Are working two or more jobs at the same time or only work for part of the year
- Claim credits such as the child tax credit
- Have dependents age 17 or older
- Have itemized deductions on prior year tax returns
- Have a high income and a more complex tax return
- Had a large tax refund or large tax bill for last year
To help you figure it all out, the IRS has an estimator on its website which uses a step-by-step process to calculate the withholding you’ll need to achieve your desired refund amount when you file taxes next year.
Be sure to have your most recent pay statements, information for other income sources, and your most recent income tax return handy before you start using the Tax Withholding Estimator on the IRS website.
Should you decide to change your withholding, you’ll need to talk with your employer. You will likely be asked to fill out a new Form W-4, the IRS document that tells your employer how much to withhold from your paycheck.