4 Questions to Address on Your Paycheck Withholding

If you are ahead of the game for 2022 and your tax returns are complete and ready to be filed, you may be caught off guard with a lower refund or an unexpected balance due.  If you are unhappy with the results, now is the time to make changes for the upcoming year.

Was your refund or balance due what you expected?

In prior years, you may have received economic impact payments, advanced Child Tax Credit payments, and higher child and dependent care tax credits.  These pandemic-related benefits disappeared in 2022 so you may be unpleasantly surprised when you review the results of your tax returns.  Check the federal and state withholdings on your paychecks.  If you need to increase your withholdings for 2023, submit a new Form W-4 to your payroll company.

Do you need estimated payments?

If your tax return shows a large balance due, consider increasing your withholdings or paying quarterly estimated payments for 2023.  The goal is to have enough tax paid in during the year to avoid an underpayment penalty. A significant balance due on your return could be the result of under-withholding on your paycheck or perhaps you received significant unearned income such as interest, dividends, capital gains, rental income, income from partnerships, etc.  The withholding on your paycheck may not be sufficient to cover the tax on your unearned income.

Did you experience a major life event?

A marriage, divorce, birth, adoption, retirement, inheritance, promotion, new job, second job, etc. can impact your tax liability, and withholding needs to be addressed accordingly.

Do you want to prioritize funding a retirement plan?

The IRS increased annual contribution limits in 2023. To reap these benefits, start contributing more now at the beginning of the year so you won’t have to play catch-up at the end of the year.  Small, systematic payments to a retirement plan help with cash flow.

In a perfect tax world, you would breakeven when you file your tax returns – a small balance due or a small refund. Not sure where to start? The IRS has an online Tax Withholding Estimator, but you should also check in with your CPA.

From our affiliate, Abacus Payroll, Inc: Double Check Your Paycheck