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Many of us have just put our 2022 taxes in the rearview mirror, but it’s still not too early to start planning for 2023. A little thinking ahead now can help you avoid unpleasant year-end surprises with your tax bill. In 2020, the IRS introduced a new format for the W-4 withholding certificate, which is the form you use to tell your employer how much to take out of your paycheck towards your income tax. Because the new W-4 works a bit differently than the old one, this has caused confusion, and many people find that their payroll withholding now falls short of covering their tax liability at the end of the year. Some taxpayers who were used to always breaking even or getting refunds when they filed their returns now find that they owe money.
The nature of this new W-4 requires a little additional planning, and to help with this, the IRS has introduced a withholding calculator to help you estimate what you should be withholding each pay period. Just input your earnings and withholding for the year so far and estimate some of your deductions and credits. Then you’ll get a general idea of whether your withholding will be enough for the year.
When completing the estimator, it is recommended that you have your most recent paystub handy (including your spouse’s if married), as well as the previous year’s tax return. Most of the information the estimator asks for will come from your paystub. The calculator also allows you to go into as much detail as you like with credits and deductions. We typically suggest keeping it simple by using the numbers from your prior year’s return. If you used the standard deduction, go with that again. If you itemized, start with the prior year’s numbers and adjust to reflect anything major that might have changed. Unless you expect significant life events like marriage, a new baby, or a child beginning college, most people will get accurate results using numbers from the previous year.
The estimate from the calculator will give you a rough idea of whether the tax you are withholding through your W-2 will cover your tax bill at the end of the year. If the calculator shows you’re likely to owe, you can ask your employer to adjust the amount taken out of your check each pay period. The easiest way to do this is to take the estimated amount owed from the calculator and divide it by the number of pay periods left in the year. Then round that to an even number and ask your employer to withhold that additional amount from each paycheck. The person responsible for HR or payroll at your employer will normally be the one who can provide that form and make the adjustment for you.
It’s important to keep in mind that this is only an estimate. Many events can affect your final tax liability, like a bonus, a raise, a new job, or increased income earned outside of your W-2, like dividends or gig work. If your situation changes during the year, you can always revisit the calculator and adjust again. And of course, you can always connect with your Cray Kaiser advisor with any questions. Give us a call at (630) 953-4900 or connect with us here.