Tax season is a time of year that sneaks up on many of us and may seem overwhelming and chaotic. There are documents to collect, paperwork to keep track of, receipts to review, and payments to make. By taking a few extra steps throughout the year, we can establish a way to stay organized and ensure we are utilizing all of our tools to be tax efficient. So, where should we begin this process?
Reviewing your Withholding
Let’s take a look at the W-2 form which reports an employee’s annual wages, and the amount of taxes that are withheld each pay period from their paycheck. There are a few factors that determine the withholding amount for each employee including the amount of income earned throughout the year, as well as the information that the employee gives to the employer on Form W-4, the “Employee’s Withholding Certificate.” Completing the W-4 allows employers to withhold the correct amount of federal income tax on a pay-as-you-go system. Included on this form is the filing status of the employee, the number of withholding allowances claimed, and additional withholding. Life has a funny way of changing before we have the chance to realize it. When big life events occur, there may be a need to change your withholding. A few examples that may lead to this change include: purchasing a new home, marrying or divorcing a spouse, birthing or adopting a child, retiring and starting/stopping a second job. For those who do not pay taxes through withholding, or don’t pay enough taxes that way, can pay quarterly during the year to the IRS. The IRS has an online tool that can help you calculate your withholding.
