Prevent a Tax-Time Surprise By Making These Adjustments
When the time comes to file a Federal income tax return, a lot of people discover that they either get a larger tax refund or owe more tax than they had expected. But this type of tax surprise doesn’t have to happen to you.
Rather than being caught off guard, you can adjust the amount of tax that’s withheld from your wages. You can also adjust the amount of quarterly estimated tax you pay.
Here are some tips to help you avoid overpaying or underpaying the IRS.
A New Job
When you begin a new job, you have to fill out an IRS Form W-4 (Employee’s Withholding Allowance Certificate). Your employer will use that form to determine the amount of Federal income tax to withhold from your paychecks. The IRS website offers a Withholding Calculator which can help you fill out your W-4.
Estimated Tax Payments
If you receive income that is not subject to withholding, you may be required to pay Estimated Tax using IRS Form 1040-ES (Estimated Tax for Individuals). This may include income from interest, dividends, rent, or self-employment. This tax applies if you meet certain conditions and you expect to owe $1,000 or more in tax. Estimated tax is typically paid quarterly (i.e. 4 times a year). You can use the worksheet on Form 1040-ES to figure the amount of tax.
Certain life events will require you to adjust your Form W-4 withholding or modify the amount of estimated tax you pay. These include a change in your marital status, the birth of a child, or purchasing a home — all of which can change the amount of taxes you owe. You can generally file a new Form W-4 at any time during the year.
Changes in Your Circumstances
Advance payments of the Premium Tax Credit are meant to help people pay for insurance bought through the Health Insurance Marketplace. If you get advance payment of the Premium Tax Credit in 2014, you must report changes in circumstances to your Health Insurance Marketplace. This includes changes in your family size or income level. You should also notify the Marketplace if you move away from an area that’s covered by your current Marketplace plan. By reporting such changes, you can help ensure that you get the proper type of financial assistance.
For more information, refer to IRS Publication 505 (Tax Withholding and Estimated Tax) and IRS Publication 5152 (Report Changes to the Marketplace as They Happen).