WASHINGTON, D.C. — As summer comes to a close, the Internal Revenue Service (IRS) is urging taxpayers to reassess their tax withholding and payment strategies. This proactive step aims to prevent unexpected tax liabilities when filing returns next year.
A significant number of taxpayers receive refunds annually. However, many unexpectedly owe taxes due to life or job changes that weren’t addressed throughout the year. The IRS highlights that individuals involved in the gig economy, those with side jobs, and anyone earning income not subject to regular withholding should pay special attention.
The federal tax system operates on a pay-as-you-go basis. This means taxpayers are expected to pay taxes as they earn income. For traditional employees, taxes are typically withheld by employers and paid to the IRS. Gig workers and others with variable income must make quarterly estimated tax payments to stay compliant.
Recent statistics reveal that two-thirds of taxpayers received refunds in 2024. By mid-May, the IRS had distributed nearly $270 billion in refunds, with the average refund amounting to just under $2,900. Overpaying leads to refunds, but underpaying can attract estimated tax penalties, which sometimes amount to several hundred dollars.
The IRS advises taxpayers, especially the self-employed and those with multiple income streams or significant life changes, to adjust their withholding or estimated payments to avoid penalties. Such adjustments help align tax payments with actual liabilities, forestalling unpleasant surprises at tax time.
The IRS offers a Tax Withholding Estimator, a useful tool on IRS.gov. This tool allows taxpayers to gauge the federal income tax they should pay throughout the year. To use it effectively, taxpayers need pay stubs from all jobs or income sources, along with their 2023 tax return.
The Estimator assists individuals in evaluating their withholding, understanding how it impacts refunds or taxes owed, and choosing withholding amounts that better suit their financial situations. If changes are needed, taxpayers can modify their withholding by submitting a new Form W-4 to their employer or pension provider. Adjustments to quarterly estimated tax payments may also be necessary.
The IRS also recommends using the Tax Withholding Estimator following major life changes, such as new employment, significant income shifts, marriage, childbirth, or purchasing a new home. These events can significantly impact tax obligations and require adjustments to avoid future discrepancies.
While the Estimator serves most taxpayers well, those with complex tax situations, such as individuals liable for the Alternative Minimum Tax, or those with long-term capital gains or qualified dividends, should consult the instructions in Publication 505, Tax Withholding and Estimated Tax.
By taking these steps now, taxpayers can avoid the stress and financial strain of unexpected tax bills in the coming year, ensuring a smoother tax season for all involved.
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