Just as you regularly check in on your physical health, it’s a good idea to do the same with your financial health. One key area to review is your “paycheck health”, so that you can ensure the right amount of tax is being withheld from your paycheck. To help you do this, the IRS has created a Tax Withholding Estimator.
Using the Tax Withholding Estimator helps taxpayers to avoid any surprises in the coming year – because while surprises are great for a party, they’re not so fun when it comes to paying your taxes. Read on for a quick guide to what this tool is and how to use it.
What is the IRS Tax Withholding Estimator?
The IRS’s Tax Withholding Estimator is a calculator that surveys you about your financial information to estimate your expected tax situation for the coming year. It’s free to access online.
Why Use an Estimator?
The IRS Tax Withholding Estimator will help you to prevent your paycheck from inadvertently having too little tax withheld – which would mean an unexpectedly high tax bill or even a penalty when tax time rolls around. On the other hand, the Tax Withholding Estimator can also help you to adjust how much tax is being withheld from your paycheck. You can choose to have less tax withheld up front, meaning that you receive a higher paycheck every month but receive a smaller refund when it’s tax time. The online tool provides simple instructions as well as a helpful tutorial video to help you make sure you’re doing everything right.
What Information Will the Estimator Need?
To properly calculate how much tax should be withheld from your paycheck and how much of a return you’re likely to be entitled to next year, the IRS Tax Withholding Estimator will need to know about your main source of income, if you plan to hold additional jobs throughout the year, and if you have any other expected sources of income beyond traditional employment. This could include receiving a taxable grant or scholarship, social security benefits, a pension, income from self-employment or income from the dividends or interest on an investment.
When providing information about your income and job, you’ll also be asked if you expect to hold the job during the next year, how often you get paid, and the amount of wages overall you expect to receive in the coming year. Prepare to estimate how much you expect to get in bonuses, as this information will help to calculate the correct tax estimate. It’s helpful to have your last pay stub with you, as you’ll also need to make a note of how much federal tax was withheld in your most recent pay statement.
You can also add information about personal contributions to a tax-deferred retirement plan such as a 401(k), or another form of tax-preferential savings such as a healthcare savings account.
What If I’m No Longer Employed?
Experiencing a change in your employment situation is a good reason to use the Tax Withholding Estimator, so that you can be better prepared for dealing with your taxes next year. Indeed, a number of people in the US have collected unemployment in 2020. If that’s relevant to your situation, you can share the details in the Estimator to get a clearer picture of what it means for your coming taxes.
Can I Use the Estimator to Calculate Deductions?
Yes! The IRS Tax Withholding Estimator includes a section to help you automatically calculate adjustments to income, so you can make note of which deductions you qualify for based on your filing status. You can either take the standard deduction, as most taxpayers do, or you can choose to itemize it. If your itemized deductions are less than the standard deduction, the program will automatically use the standard deduction.
The Estimator will also help you to see what tax credits you’re entitled to due to having dependents; including the number of dependent children under 17, an estimate of work-related child and dependent care expenses, how many kids qualify you for earned income tax credits, and any adoption-related tax credits you are entitled to.
What Do I Do With My Results?
Once you’ve input all information about yourself and your household, the Estimator will show you how much you’re likely to overpay in taxes and therefore, how much your estimated tax refund will be. The Estimator also has an interactive results adjustment slider bar that you can use to see what adjustments to your W4 tax form you would need to make in order to receive a smaller or larger refund. This would usually mean asking your employer to withhold a greater amount from each pay period.
Finally, there will be a table with a summary of all your inputs and calculations, with all the key information about your taxable income, tax credits, tax after credits and so on. This is a great cheat-sheet to see all your tax information in one place.