As your life evolves, so do your individual and family needs, income, and tax deductions. To avoid owing the IRS a significant balance or receiving too large of a refund that hasn’t received any interest, you should do mid-year checkups on your tax withholding. Below, learn what withholding is, the best tax preparation steps to take for them, and when you need to adjust them. 

The Basics of Withholding

What Tax Withholding Is

Tax withholding is the amount of money taken out of your paycheck every pay period and given to the Internal Service Revenue’s (IRS) for annual taxes. Over the course of a year, withholding amounts stack up and are applied in a lump sum to the amount you owe the IRS.

One of three things will happen after this. First, you could break even; however, this is rare. Second, you could owe the IRS money if you didn’t withhold enough from your paychecks. Third, you may receive a return that is slightly too large if you applied too many withholding amounts. While receiving a large return may sound desirable, it means that you diverted more of your income to the IRS than you needed to and were unable to invest this money, save it, or put it toward spending goals.

How to Accurately Calculate Withholding Amounts

Many tax preparation services recommend calculating your annual withholding by preparing a projected tax return for the current year. Substitute the current tax rates on the tax forms you used last yearde and add in your expected income and deductions for this year. Then use the IRS’s calculator to see the recommend withholding amount.

Why You Should Perform a Mid-Year Checkup

The Internal Service Revenue (IRS) recommends that taxpayers perform a mid-year checkup using the IRS’s Withholding Calculator. This checkup is a crucial tax preparation step if you have multiple jobs, claim credits, or are a two-income family. 

If you have multiple jobs during the same period, you should complete a checkup to ensure the amount of tax withheld from each job is accurate, even if one of these jobs is just a seasonal position. If you claim certain credits, such as a child tax credit, you should check-up to see if the same credits are applicable as your jobs change. Finally, following the changes to the U.S. tax code that took place in 2018, two-income families are more vulnerable to being under- or over-withheld.

If you need assistance with tax preparation, consult the experts at Sharrard, McGee and Co., PA, in Greensboro and High Point, NC. Their partners and tax consultants are directly involved with clients and have served their communities for over 40 years. Call (336) 272-9777 to speak with a member of their team or visit their website to learn more about their services.