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If you’ve recently encountered a tax obligation or an unexpectedly large refund, it might be prudent to revisit your paycheck withholding arrangements. This process, while seemingly complex, is essential for ensuring financial accuracy throughout the year.
Typically, taxpayers receive a refund when they have overpaid their taxes during the year and face a bill when they have underpaid. The onus falls on employees to specify the federal tax withholding amounts from each paycheck using Form W-4.
Tommy Lucas, a certified financial planner and enrolled agent at Moisand Fitzgerald Tamayo in Orlando, Florida, emphasizes that updating this form can feel overwhelming, likening it to a complex mathematics problem. However, he offers a simplified approach to navigate this task.
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Simplifying Your Withholding Calculations
After completing your tax return for 2024, you can find your “total tax” amount on line 24 of the second page of Form 1040. Assuming your income and tax status remain unchanged for 2025, your tax obligation should follow a similar pattern.
To determine if you are on track with your withholding, check how much is being withheld from each paycheck and calculate how many pay periods remain in the year.
For instance, if your total tax liability for 2024 was $10,000 and there are 23 pay periods left in 2025, you would need to withhold approximately $435 from each paycheck, according to Lucas.
To increase your withholding, you can refile your Form W-4, incorporating an “extra withholding” figure in the “other adjustments” section of step 4.
“This is the straightforward, back-of-the-napkin approach,” Lucas stated.
It’s vital to remember that your W-4 should be updated at the beginning of the new tax year, as well as whenever any significant financial changes occur—such as receiving a bonus, starting a second job, getting married or divorced, or having a child.
Utilizing the IRS Tax Withholding Estimator
For those whose financial situations have recently shifted or those seeking a more comprehensive revision, the IRS offers a tax withholding estimator that can be a valuable resource, according to Lucas.
This free tool is designed to be user-friendly and is regarded as effective. However, to utilize it fully, you’ll need pay stubs from all jobs (including those of a spouse) and your most recent tax returns. The estimator may not suit individuals with more intricate tax situations.
Additionally, Sheneya Wilson, a certified public accountant and founder of Fola Financial in New York, notes that with frequent fluctuations in income, investment earnings, or retirement distributions, there may be a need for quarterly estimated tax payments to prevent potential penalties from the IRS.
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