Whether workers get a windfall from Uncle Sam or wind up owing taxes mostly comes down to filling out one form correctly – and few people are doing it. In fact, 45% of the people polled by the American Institute of CPAs said they don’t know when they last reviewed the amount of tax withheld from their paychecks.
It turns out that many people are unfamiliar with W-4 forms that allow them to determine whether they’re owing or getting a tax refund. While taxes and filing a tax return may seem daunting, it’s important to remain on top of the situation to know how it will impact your finances.
While many people assume they just owe taxes, it’s important to note that it is not always the case. Indeed, the IRS issued 125.3 million refunds for the 2019 year, with recipients getting back an average of $2,535, according to agency data as of Nov. 20.
With 2021 just around the corner, now is the perfect time to reassess your withholdings so that you can start the new year on the right foot. People who become more familiar with their W-4 seem to be able to get their withholdings to be more realistic. Any changes to your exemptions would take effect at the start of the year if you do it now.
It’s also important to be aware of the “feel-good effect.” While it feels good to get a hefty check from the IRS in the spring, it really means that you voluntarily overpaid Uncle Sam in the prior year. In other words, your withholding was too high and you took home less cash.
Meanwhile, if you wound up owing the taxman, you may have pocketed more money – but you also paid too little in tax over the year.
Employers use this document alongside the tax withholding tables to figure out how much income tax gets pulled from your paycheck. The W-4 considers the number of dependents in your home, your filing status – single, married and filing jointly, or head of household – the income you bring in and whether you take the standard deduction or itemize deductions on your tax return. Key life events also warrant updating tax withholding, including getting married or divorced or having a child.
The form is also worth another look if you’re working 9-to-5 while generating side income from other work; it’s easy for new entrepreneurs to fall short of paying quarterly estimated taxes.
While tax season can be confusing and stressful, it’s crucial to understand your situation. Consider seeking help from a financial advisor or accountant when it comes to your taxes to help you better understand your withholdings. If you have any questions, please reach out to us at email@example.com or schedule a complimentary 30-minute consultation.