Estimate Taxes Now; Prevent Surprises Later

With the end of year holidays looming, you’re probably not thinking about your income taxes at this time. But because waiting until spring to consider tax issues can result in some unpleasant surprises, it makes sense to do a quick check-up now.

The IRS website offers a helpful Tax Withholding Estimator tool that can help you assess your federal tax withholding with regard to your income. After you answer a few questions, the tool generates an estimate of your taxes due in April. You will also receive a suggestion for your weekly or biweekly paycheck withholding, so that you can take care of your taxes ahead of time.

If it looks like your paycheck withholding won’t sufficiently cover your taxes due, you can contact your HR department and make the necessary adjustments. Keep in mind that adjustments this late in the year will need to cover amounts due from earlier in the year, or you could still end up owing.

Assuming the information you enter is correct, and nothing major changes before the end of the year, you shouldn’t end up with a large amount due when you file your taxes in the spring. That’s good news for those who have experienced unhappy surprises in the past.

On the flip side, you might wonder if increasing your withholding beyond the amount due could help you reap a refund check in the spring. Yes, that’s technically true , but this isn’t really the best plan in most cases. You will be loaning the government money, interest free! You would probably benefit more from diverting that money to your retirement account, or an interest bearing savings account (everyone needs an emergency fund).

The tax estimator tool works for retirees, too. So you can estimate withholding from your pension payments or other taxable income, and make the appropriate adjustments. Retirees, in particular, might want to avoid any surprise amounts due at tax time.

If you have any other questions regarding taxes in retirement, or financial planning in general, call our office to schedule an appointment. We can help you anticipate future taxes and other financial issues, so that unpleasant surprises can hopefully be a thing of the past.