IRS Recommends End-of-Summer Tax Review to Avoid Surprises

The Internal Revenue Service (IRS) highlighted the importance of adjusting tax withholdings or estimated payments as the summer ends, helping taxpayers prevent unexpected bills at tax time next year.

While the majority of taxpayers receive a refund, a significant number often find themselves unexpectedly owing taxes due to changes in life or employment that weren’t accounted for in their tax withholdings. Those particularly at risk include gig economy workers, individuals with side jobs, and anyone earning income not automatically subject to withholding.

To avoid these surprises, the IRS recommends using their Tax Withholding Estimator. This tool helps align the taxes paid during the year with the actual tax liability, ensuring taxpayers neither overpay nor underpay significantly.

Understanding Refunds and Payments

The U.S. federal tax system operates on a pay-as-you-go basis, where taxes are paid as income is earned throughout the year. Many employees have taxes withheld from their paychecks, which are then sent to the IRS by their employers. Conversely, gig economy workers and other self-employed individuals typically make quarterly estimated tax payments to meet their tax obligations.

Recent data reveals that two-thirds of taxpayers received a refund so far in 2024, with nearly $270 billion refunded by mid-May. The average refund was just under $2,900.

Avoiding Penalties

On the other hand, failing to accurately estimate taxes can lead to penalties, sometimes amounting to hundreds of dollars. Adjusting paycheck withholdings or estimated tax payments can help mitigate this risk. This adjustment is crucial for those experiencing significant life changes such as marriage, the birth of a child, or a new job.

Using the Tax Withholding Estimator

Located on the IRS website, the Tax Withholding Estimator provides a straightforward way for taxpayers to calculate the correct amount of federal income tax to withhold. To use the estimator effectively, taxpayers need recent paystubs, information about other forms of income, and their previous year’s tax return.

The estimator offers insights on:

• Estimating federal income tax withholding.
• Understanding the impact of different withholding amounts on refunds, take-home pay, or tax due.
• Selecting an appropriate withholding amount for individual or family needs.

If adjustments are needed, taxpayers can submit a new Form W-4 to their employer or adjust their quarterly tax payments accordingly.

For Major Life Changes

The IRS also advises checking withholding levels following major life events like getting a new job, a significant income change, marriage, childbirth, or buying a home. For those with complex tax situations, such as owing Alternative Minimum Tax or dealing with long-term capital gains, the IRS directs to Publication 505, Tax Withholding and Estimated Tax, for detailed guidance.

This proactive approach not only helps manage financial planning but also prevents the stress associated with unexpected tax bills.

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