Why Checking Your Withholding at Tax Time is Crucial: Avoiding Surprises and Penalties
When reviewing your tax return, if you find that you owe more than expected, it may be time to update your withholding. Checking your withholding at tax time is crucial to ensure you pay the correct amount of taxes throughout the year. Withholding is the amount of money deducted from your paycheck / or retirement income. If your withholding is too low, you may owe more taxes when you file your return, resulting in a surprise tax bill. By reviewing your withholding based on your tax return results, you can make any necessary adjustments to avoid underpaying or overpaying your taxes, which can help you avoid penalties or unexpected tax bills in the future.
In addition to updating your withholding, making estimated tax payments can help you avoid underpayment penalties and ensure you’re paying enough taxes throughout the year. Estimated tax payments are quarterly payments to the IRS and/or state tax authority based on the income you earn for the year. If you’re self-employed or have other types of income that are not subject to withholding, making estimated tax payments is especially important. By estimating your tax liability and making quarterly payments, you can avoid having to pay a large tax bill at once.