It’s a nice feeling to owe zero on your federal tax return. And you can do that if you manage your resources wisely. When you start a new job, the W-4 form you fill out for your employer affects how much income tax will be withheld from your paycheck and, eventually, how much tax you will owe or get as a refund when you file your taxes.
What you may not realize is that it is not a one-time occurrence. You may submit an updated W-4 form to your employer at any time. Managing how much your employer withholds via your W-4 form increases your chances of owing no taxes in April. Of course, you should avoid withholding too much information. That would be a year-long interest-free loan to Uncle Sam.
Here’s how to make your tax bill as near to zero as possible before the deadline.
- The W-4 form you complete for your employer impacts the amount of tax deducted from your paycheck throughout the year.
- You may use an online calculator to estimate your tax due for the year and evaluate if you have too little or too much withheld.
- Once you’ve determined this, you may file a fresh W-4 to move closer to owing zero at tax time.
Estimate What You’ll Owe
If you’re a salaried employee with a stable job, calculating your tax due for the year is quite simple. You can forecast your overall earnings.
Millions of Americans do not fit within the aforementioned description. They freelance, perform numerous jobs, are paid hourly, or rely on commissions, bonuses, or tips. If you’re one of them, you’ll have to make an informed prediction based on your earnings history and how your year has progressed so far.
There are various techniques to acquire a decent estimate of your tax due from there.
1. Use an Online Calculator
There are several free paycheck and income tax calculators available online. When you input your gross salary, pay frequency, federal filing status, and other pertinent information, the calculator will calculate your federal tax burden per paycheck or per year.
This approach is simple, and the outcome will be relatively accurate—but it may not be perfect since your real tax obligation may be affected by other factors such as whether you itemize deductions and which tax credits you claim.
2. Use a Tax Withholding Estimator
The Internal Revenue Service (IRS) website’s tax withholding calculator is especially helpful for persons with more complicated tax circumstances. This tool takes longer to use than a basic calculator, but it is also more accurate.
It will inquire about your eligibility for child and dependent care tax credits, if you contribute to a tax-deferred retirement plan or a Health Savings Account, and how much federal income tax was taken from your most recent paycheck.
Based on your responses, it will calculate your projected tax liability for the year, the amount you will have paid via withholding by the end of the year, and your predicted overpayment or underpayment.
3. Fill Out a Sample Tax Return
Another alternative is to prepare a sample tax return for the year by utilizing tax software or downloading and filling out the necessary paperwork from the IRS website by hand.
This technique will provide you with the most precise picture of your yearly tax due, but it will also take the longest.
If you’re using last year’s tax software or IRS forms, be sure no substantial changes to the regulations or tax rates have occurred that might influence your position.
How To Get The Most Money Back On Your Tax Return
Adjust Your Tax Withholding
Once you’ve determined how much you’ll owe in federal taxes, determine how much you need to have withheld every pay period to meet — but not exceed — that objective by Dec. 31.
Then, fill out a new W-4 form accordingly.
You are not required to wait for your employer’s human resources department to provide you with a new W-4 form. You may get one from the IRS website.
If Your Employer Isn’t Withholding Enough
The W-4 form includes a section for you to select how much more tax you want withheld each pay month.
If you’ve already underpaid, deduct the amount you’re on pace to pay by the end of the year at your current level of withholding from the total amount you’ll owe. Then divide the figure by the number of remaining pay periods in the year.
This will indicate how much more you want withdrawn from each paycheck.
You might alternatively reduce the number of withholding allowances claimed, but the findings would be less accurate.
If You’ve Been Overpaying
Unless you expect a large return, consider raising the number of withholding allowances you claim on the W-4.
Choosing a precise number might be difficult. A easy technique is to enter various amounts of withholding allowances into a paycheck calculator until it reaches the amount that is closest to the federal tax that you want withheld for each pay period going ahead.
It is important to note that the IRS expects you to have a reasonable basis for the withholding allowances that you claim. It does not want you tinkering with its form in order to postpone paying taxes until the last minute. It may punish you and prosecute you if you purposefully withhold too little by supplying inaccurate information on your W-4. It may also oblige your employer to withhold the appropriate amount, removing the option from your hands.
If you do not have enough tax withheld, you may face fines.
To prevent underpayment fines and interest, you must have adequate tax withheld throughout the year. Underpayment penalties are distinct from lying penalties, and they apply even if you committed an honest mistake.
To prevent underpayment penalties, make sure your withholding matches at least 90% of your current year’s tax due or 100% of your prior year’s tax liability (110% if your AGI is $150,000 or above), whichever is less.
You’ll also avoid fines if your tax liability is less than $1,000.
Other Ways to Adjust Your W-4
If you haven’t gotten any paychecks yet this year, just divide your total tax burden for the previous year by the number of paychecks you get in a year. Then, after you’ve received your first paycheck of the year, compare that amount to the amount withheld from it, and make any required modifications from there.
If you change your W-4 to compensate for an underpayment or overpayment throughout the year, you’ll need to fill out a new W-4 in January. Otherwise, your withholding will be suspended for the next year.
Of course, if your revenue changes erratically, this becomes much more difficult. However, following the techniques outlined above should help you reach close to a fair figure.
Remember, you may redo your W-4 as many times as you need during the year.
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