We may be in the middle of the 2023 tax season, but it’s not too early to check if you’re setting aside enough for next season’s filing.
That’s because tax withholdings are estimates, which can end up being too much or too little money depending on your income and tax status, which may have changed since you last filed.
If you contribute too little money, you might receive a sizable tax bill you weren’t expecting when you file your taxes next year. If the amount of unpaid taxes is large enough, you might also be subject to an underpayment penalty. That’s because the U.S. tax system is pay-as-you-go, which is why freelancers and self-employed workers are expected to make regular quarterly tax payments throughout the year.
Conversely, if you allow too much money to be withheld, you might be shorting yourself on much-needed cash each month for no real reason, essentially giving the Internal Revenue Service an interest-free loan.
Here’s how you can check your tax withholdings and make adjustments, if needed.
Why your tax withholding might need adjusting
Whether your tax withholding is tabulated by you or an employer through a W-4 form, anything that changes the size of your tax liability, or the amount of taxes you owe, could change the amount of money you owe the IRS.
Aside from changes to your income, this includes a change in your marital status, retirement contributions, tax credits, health-care debt or whether you add a dependent.
“If your marital status has changed, your earnings have changed, or you are contributing quite differently this year to a 401(k) — perhaps to a Roth 401(k) instead of the traditional 401(k) — you need to review your tax withholding rate,” says Michelle Gessner, a certified financial planner based in Houston.
Just one of the changes described above could have a big impact on your taxes. Take adding dependents, for example: They can lower your tax bill by thousands of dollars if you claim credits like the child tax credit, the child and…
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