Don’t give interest free loan to the IRS

Do you like giving interest free loans to the IRS? If not, you might want to check your tax withholding and adjust it accordingly. Tax withholding is the amount of federal income tax that your employer deducts from your paycheck and sends to the IRS on your behalf. The amount of tax withheld depends on your income, filing status, deductions, credits, and other factors.

If you withhold too much tax, you are essentially giving the IRS an interest free loan until you get your refund. On the other hand, if you withhold too little tax, you might end up owing a large amount of tax when you file your return. This could result in penalties and interest charges, as well as a financial burden.

The best way to avoid these scenarios is to estimate your tax liability for the year and adjust your withholding accordingly. This will help you balance your tax payments throughout the year and avoid surprises at tax time. One tool that can help you do this is the IRS Tax Withholding Estimator on the IRS website. This online tool helps employees and self-employed individuals who have wage income estimate their 2023 income tax.

You should adjust your tax withholding once in the beginning of the year and once in October to ensure that your tax withholding closely matches your tax liability for the year.

To use the Tax Withholding Estimator, you will need some information ready, such as:

• Your paystubs for all jobs (and your spouse’s, if applicable)

• Other income information (such as self-employment, investments, etc.)

• Any deductions or credits that you plan to claim

The Tax Withholding Estimator will guide you through a series of questions and provide you with a personalized recommendation for your withholding. It will also show you how your withholding affects your refund, take-home pay, or tax due. You can use the Tax Withholding Estimator to try different scenarios and see how they affect your tax situation.

Once you have your estimate, you can use it to change your tax withholding amount on Form W-4, Employee’s Withholding Certificate. Form W-4 tells your employer how much federal income tax to withhold from your pay. You can submit a new Form W-4 to your employer at any time during the year to update your withholding.

Form W-4 has been redesigned in 2023 to reflect the changes made by the Tax Cuts and Jobs Act of 2017. The new form is simpler and more accurate than the previous version.

By using the Tax Withholding Estimator and updating your Form W-4, you can ensure that your tax withholding matches your tax liability as closely as possible. This way, you can avoid giving interest free loans to the IRS or facing unexpected tax bills at the end of the year.

Source: Tax Withholding Estimator | Internal Revenue Service (irs.gov)