Don't Mess With Taxes

Tax Day 2022 is a month away. That means lot of us are finally getting serious about filling out our 2021 tax returns.

A lot of us also are making a disturbing discovery. Our refunds aren't as big as we expected.

Even worse, in some cases we owe tax.

There are several reasons your refund could be smaller or you must send Uncle Sam a check. You can check them out in my previous post, 5 reasons your tax refund this year might be smaller.

But here's a preview of one of the reasons. You didn't have enough withheld.

Or, as #TaxTwitter pal and Enrolled Agent Amber Gray-Fenner (aka @taxtherapist505) recently characterized this situation, "stupidly low" federal withholding.

Check out the full Twitter thread. Several tax professionals offer some solid reasons why this off-kilter withholding might be happening.

New tax law, new withholding calculations: One reason cited by several — looking at you, @BSG_BobKerr and @yoyo101010 — is that we're all still dealing with the changes to the W-4 wrought by the Tax Cuts and Jobs Act, the major tax reform measure enacted at the end of 2017.

Form W-4 is the document you give your payroll office so that your boss knows how much income tax to withhold from each paycheck. Tax reform's many changes meant the Internal Revenue Service had to come up with a new W-4. And it's apparently still posing problems.

One of the biggest issues is that workers haven't reviewed and adjusted their withholding. It's always a good idea to look at each year, even if you don't think your tax situation has changed.

But almost everyone's tax circumstances do change at least some. Kids who are dependents get older, affecting tax credits. Your spouse got another job. Or quit his or her job. Or started a new business.

And don't even get me started on all the tax law changes created in response to the COVID-19 pandemic.

Paycheck checkup time: So now, as you're wrapping up your 2021 filing, is also a good time to review your withholding.

And you should use the IRS' online Tax Withholding Estimator. It walks you through the calculation process, as the screenshot below shows, to help you get the most accurate withholding.

The online tool is available in English and Spanish. And, says the IRS, this paycheck checkup works for most taxpayers.

It helps employees avoid having too little or too much, which happens, especially for folks who use withholding as a forced savings account, but that's another post.

The estimator also helps self-employed people make accurate estimated tax payments.

After you get the results, then you give your employer a new, more correct Form W-4, excerpt shown below.

See more common tax forms and more about them at Talking Tax Forms!

Before using the online withholding estimator, gather your latest tax return, as well as your most recent pay stubs and income documents. This includes —

• All W-2 forms from employers,
• 1099 forms from banks and other payers, Forms 1095-A from the health care marketplace for those claiming the Affordable Care Act premium tax credit, and
• Form 1099-NEC, Nonemployee Compensation, statements you got for freelance contract work.

Then just follow the only withholding path.

Pension checkup, too: Remember, too, that pension income is in many cases taxable.

So if you're having withholding taken out of pension payouts, then a review of your taxes on that retirement income and possible adjustments here are a good idea.

In those cases, as you'll submit a new W-4P, excerpt shown below, to your retirement payer.

See more common tax forms and more about them at Talking Tax Forms!

More withholding work for some: As noted, the online tool works for most folks. But not all.

If your tax situation is more complex, the IRS recommends you use the instructions in Publication 505, Tax Withholding and Estimated Tax. This includes taxpayers who owe alternative minimum tax or certain other taxes, and people with long-term capital gains or qualified dividends.

Or, of course, talk with your tax preparer about the changes you need to make.

Check payroll (and pension) withholding now: Don't put off making the changes. The sooner in the year you make sure your withholding is accurate, the longer you'll have to spread the amounts over many months.

That will mean next filing season you'll be close to the appropriate tax paid, and not have to come up with more than you expected when you send in that tax return.

And if you do have to bump up your withholding, by having it taken out over more paychecks, each payday's bite will be a little less than if you had to make it up near the end of the year.

You also might find these items of interest:

• When will you get your tax refund?
• The scoop on paying estimated taxes
• Be sure to report cryptocurrency activity on your tax return

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