It’s Thanksgiving week. Most Americans are looking forward to the upcoming fourth Thursday in November, when they’ll gather to share food and fun with family and friends.
A turkey will be the featured food on most tables, a tradition dating from the turn of the 19th century.
But turkey also is disparaging slang for loser.
Tax turkeys, in addition to being unwanted, can be costly, which brings us to another Thanksgiving tradition: the ol’ blog’s Tax Turkeys to Avoid feature. For the next five days, including the holiday itself, a tax turkey and how to avoid it will take the spotlight.
Here’s hoping each tax foul (sorry, not sorry for the homophonic pun) will help ensure you’re as thankful next tax filing season as you are on Turkey Day.
Assessing and adjusting incorrect withholding: The U.S. tax system is pay-as-you-go. This allows the Internal Revenue Service to get tax money needed for federal programs throughout the year.
Most of us are aware of this due to the income (and other) taxes that are withheld from our regular paychecks.
But too often, too many people fall prey to this year’s first Tax Turkey to Avoid. They never look at their withholding after that first visit to their job’s payroll office, even when their lives have changed in ways that could affect their tax bills.
Your first step to avoid here is look at where you stand. By now, you should have a good idea of what your final 2024 earnings will be. You can do a quick, down-and-dirty review to get an idea of where your withholding stands.
Simply look at your last paystub and see how much total income tax has been taken out so far. Then, if you’re income and lifestyle this year is about the same as last year’s, pull your last tax return copy from your files and see how this year’s amount compares.
If nothing’s changed substantially and your withholding is comparable to last year, great.
But if you had a life-changing event that could affect your taxes, such as having a child or getting married or divorced, you might need to adjust your withholding. A tweak for even the last few pay periods of the year could help at least a little.
Minimizing estimated payments: Another withholding factor could be side hustles. If you had gig work in addition to your salary-paying job, you’re going to owe tax on those added earnings.
And since there probably wasn’t any tax withheld from those gig payments, you’re responsible for meeting the pay-as-you-earn tax requirement by making estimated tax payments.
However, adjusting your withholding could help here, too.
Uncle Sam just wants your total tax due in a timely fashion. That means he’ll accept it in a combination of withholding and estimated taxes.
So, if you can afford to increase the tax taken out of your paycheck over the last pay periods of the year so that they cover at least some of the gig tax due, it will help cut your final estimated tax bill due on Jan. 15. If you’re married and file a joint return, your spouse’s increased withholding counts here, too.
Close to what you owe as you owe goal: The withholding goal is to get as close to your eventual annual tax liability as possible.
Yes, I know some people like to over withhold so they'll get a refund check when they file. But that means you have to wait until tax time to get the money, and hope that the IRS doesn’t encounter delays that could keep you waiting and waiting and waiting for your tax cash. If you adjust your withholding, you’ll have your tax money in hand throughout the year.
And one thing’s certain. You don’t want to under withhold too much. Owing a small amount at filing time is not a disaster. But nobody wants to pay a big tax bill on April 15, or the added costs that the IRS will tack on if you underwithheld too much.
So review your withholding now, and make any necessary adjustments.
Making the change: The IRS's withholding estimator can help you determine the proper amount.
Then plug your withholding changes into the new Form W-4 you'll give your payroll administrator. That way, your company can withhold the new amount from your remaining paychecks.
You can find more on using the IRS online tool and filling out a W-4 in my post on how to get your tax withholding just right.
You also might find these items of interest:
- 6 family-friendly tax credits
- A mini tax primer for students with summer jobs
- Safe harbors and other ways to avoid estimated tax penalties
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