Your Withholding May Be Too Low … Avoid “Tax-Due” Surprise
Wage inflation has become increasingly common in this post-pandemic employment environment…and may directly affect you and/or a joint-filing taxpayer. As the economy rebounds, employers actively bid for retention and attraction of quality workers. Bumps in compensation for current workers are common. Additionally, hiring managers sweeten offers with signing-on bonuses and compensation boosted to equal and often exceed pre-pandemic norms.
Another development is 2023 tax brackets have been adjusted to reflect the sizeable inflationary price increases in decades. The 2023 brackets sustain upper limits 7% higher than those for 2022 returns. If wage inflation has kept your income level, even or above price inflation, you may be subject to higher tax rates.
In this article we’ll talk through avoiding an unexpected tax-bill by initiating a Paycheck Checkup. Your objective…make sure the right amount of tax is withheld from your earnings. Two events may affect your withholding … a boost in your income and revisions to the Tax Cuts & Jobs Act (TCJA). The TCJA took effect on January 1, 2018, and substantially impacts many taxpayers through 2025.
If your withholding proves to be deficient, now is a good time of year to submit a new Form W-4 Employee’s Withholding Certificate to your employer. All taxpayers should check, but especially those who fit the following profiles:
• Are a two-income family or someone with multiple jobs
Dual income families or with a breadwinner working multiple jobs may be vulnerable to appropriate withholding based on major changes in tax law.
• Work a seasonal job or only work part of the year
Unlike employees who work year-round, the amount of withholding for seasonal workers or those who work only part of the year will find changes to withholding can have a significant effect on withholding for each paycheck.
• Claim the Child Tax Credit
The law expanded and made significant changes to the Child Tax Credit. It also suspended the deduction for personal exemptions. Either of these events may affect taxes due.
• Have dependents age 17 or older
The Tax Cuts and Jobs Act (TCJA) added a new credit. Dependents who can’t be claimed for the Child Tax Credit may qualify under the Credit for Other Dependents. This is a credit of up to $500 per qualifying person.
• Itemized your deductions in previous tax years
The TCJA nearly doubled standard deductions and changed several itemized deductions. If you formerly itemized, you may now find it advantageous to take the standard deduction. This change could affect your withholding amount.
• Have high income or a complex tax return
High income taxpayers and those with complex returns are more likely to be affected by changes in the law. The same is true for taxpayers who make quarterly estimated tax payments to cover other sources of income or those who are subject to the self-employment tax or alternative minimum tax.
• Had a large tax refund last year
The TCJA made major changes to the tax law. Any of these revisions could affect refund amounts.
• Had a tax bill last year
Taxpayers who owed additional tax when they filed their last federal tax return should be mindful to avoid another unexpected tax bill next year by doing a Paycheck Checkup.
• Received unemployment at any time during the year
If you received unemployment compensation and did not elect to have federal income tax withheld, you may be required to make quarterly estimated tax payments.
• Experienced a significant life-changing event, e.g., marriage, childbirth, adoption, home purchase.
You may have experienced one or more life events that impact your taxes and the amount of withholding you should maintain. Click here to review the IRS list of life event resources and the tax effects of each.
Let us help you with a Paycheck Checkup. Give us a call!
Together we will determine if you should complete a new Form W-4,
and/or make an additional or estimated tax payment before year end.