It’s hard to believe that we are already into the last quarter of the 2021 calendar year. Time for sweaters, pumpkin spice, and income tax withholding reviews. Yes, income tax withholding. Checking your tax withholding before year-end can save you an expensive surprise when you file your 2021 income tax returns.
The IRS, states, and the District of Columbia expect you to pay your tax obligation as your income is received. Failing to pay the minimum required tax amount can result in an underpayment penalty and interest on the unpaid balance. Alternatively, overpaying on your tax liability means giving the tax agencies an interest-free loan of your money. Who wants to do that? Knowing about that big refund in advance gives you an opportunity to reduce your tax withholding and get some extra money in your paycheck.
Even if you didn’t get a large refund or pay an underpayment penalty for 2020, it’s advisable to review your tax withholding now. Tax law changes related to COVID-19 were enacted for 2020 and 2021 that could impact your tax situation. Plus, life can bring changes to individual financial situations that could impact your tax filing status or how the rules apply to you. Examples include change in marital status, birth or adoption of a new child, a home purchase, and the impact of a major disaster.
The IRS Tax Withholding Estimator (available in English and Spanish) makes it easier for everyone to have the right amount of tax withheld. The tool offers workers, as well as retirees, self-employed individuals and other taxpayers, a user-friendly, step-by-step way to effectively tailor the amount of income tax they have withheld from wages and pension payments. In other cases, such as for self-employed individuals, taxpayers can see if they should change their last planned estimated tax payment for 2021.
In between getting out the holiday sweaters and watching football, the last quarter of the 2021 calendar year is the perfect time to check on your income tax withholding. It could save you an expensive surprise when you file your 2021 income tax returns or provide an opportunity to get some extra holiday shopping money in your last few paychecks.
Want more information about taxes, estimated taxes, and tax withholding? The IRS has it for you at https://www.irs.gov/newsroom/give-tax-withholding-a-fresh-look-as-2021-year-end-nears.