Almost 29 million taxpayers have filed returns so far this 2023 tax season.
Most early filers are tax refund recipients. Those of us who tend to owe send our 1040s to the IRSs closer to the April deadline, which is on the 18th this year.
Both filing tendencies underscore a need to get tax withholding right.
Overwithholding costs: IRS data show that most taxpayers, around 70 percent each year, choose to use the unofficial bank of the Internal Revenue Service as a savings account. They intentionally overwithhold income tax from their paychecks so that they will get a refund when they file.
The IRS' Feb. 10 statistics show that the average refund is $ 1,997.
Sure, it's nice to get that almost 2 grand in a lump sum. But if you got it throughout the year, that's almost $166 a month that could buy groceries, pay utilities, or go into a savings account for a vacation or to cover emergencies. And while interest rates at most banks are still minuscule, they at least pay a small percentage, while the IRS gets to hold your overpaid taxes for free.
Plus, even though the IRS looks to be back on track when it comes to refund issuance, if it encounters any processing problems (remember the COVID-19 pandemic backlog?), your wait for your refund could be excruciatingly long.
By adjusting your withholding to get that to-be-refunded tax money now, you don't have to wait. And since we're just into February, you'll get almost a full year's worth of those previously overwithheld taxes.
Underwithholding costs: Filers at the other end of the tax cash spectrum tend to have to scramble every April to come up with the money due Uncle Sam.
If it's an unusually large amount, that could pose a huge financial burden. Or force you into a payment arrangement, which will add interest to your due tax.
As with overwithholding taxpayers, the best move for folks who don't have enough tax taken out of their paychecks is to adjust the amount. Here, you send a few more bucks to your IRS account each paycheck.
By doing so now, earlier in the tax year, your additional tax payments will be spread over more pay periods. That will mean a smaller bite out of each paycheck.
New W-4 for withholding changes: As mentioned earlier, it's relatively easy to make a change to your withholding either way. You simply have to give your payroll administrator a new Form W-4, Employee's Withholding Certificate. That's an excerpt below.
You can change your withholding amount any time of the year. The only thing you have to worry about is your payroll office's patience if you tweak the amount several times.
But don't be dissuaded by a little eye-rolling, especially when the withholding changes are because of new circumstances.
Life changes mean changing withholding: Most of our lives are full of changes, and many of them affect our taxes.
Getting married, divorced, and welcoming a new bundle of joy into your family could mean changes to what you owe.
Major disasters also could affect your tax situation. Millions across the United States each year endure wildfires, hurricanes, tornadoes, floods, and more year. Special tax law provisions, such as claiming disaster-related losses, can help affected taxpayers and businesses recover. It also can change their ultimate tax bills.
Then there's the tax code. Sometimes Congress and the White House change laws that affect our taxes. Depending on when the laws take effect, you could need to make withholding changes during the year.
All of these (and more) will affect your main job's proper withholding amount.
Figuring your appropriate withholding: OK, you've decided you do need to tweak your workplace withholding. But by how much?
This IRS can help. It has an online Tax Withholding Estimator, available in English and Spanish.
The estimator's results can help you fill out the new W-4 to give to your employer.
Other options for other tax situations: If, however, your tax situation is more complex, the IRS recommends checking out IRS Publication 505, Tax Withholding and Estimated Tax instead of the online tool.
Taxpayers who should look at Publication 505 include employees who owe the alternative minimum tax or tax on unearned income from dependents. It can also help those who receive non-wage income such as dividends, capital gains, rent payments, and royalties. The publication's worksheets, flow charts, and examples offer more guidance for taxpayers in these special situations.
The IRS also has special forms and instructions for retirees who need to withhold from pensions or annuities (Form W-4P), and taxpayers with nonresident alien status (Notice 1392, Supplemental Form W-4 Instructions for Nonresident Aliens).
The bottom line in all these cases is to be like Goldilocks in paying tax during the year on your income as you earn it. Not too much. Not too little. Just right.
You also might find these items of interest:
- 5 tax considerations for young workers and their parents
- Tax Turkey to Avoid #1: Incorrect withholding and how to adjust it
- More returns filed early in 2023, but average tax refund amount is smaller
- Texas border troops could face surprise tax bills due to underwithholding error