A lot of things can change in a year – including some events that can affect your taxes. If you received larger refund than you thought you would in April or ended up owing money to the IRS, it may be worthwhile to review your tax situation before the end of the year.
The average American pays about 19.8 percent of their annual income in taxes, but that can vary widely based on income and deductions. If your income changed, you got married, had or adopted a baby, bought or sold a home or there was another major life event, you should take a look at your withholdings to ensure you aren’t overpaying — or underpaying!
The average federal tax refund is more than $3,100 dollars, according to the IRS. While it may be fun to get that money every spring, you’ve essentially given the government an interest-free loan. If you do get a refund, you should want it to be very small so you can use that money yourself throughout the year. If you owe money in taxes at the end of the year, that one-time payment probably should have been spread out over the past 12 months. The ideal situation is nothing owed, nothing refunded.
The IRS has a tax withholding calculator you can use to estimate how much you should be withholding for taxes. The calculator is designed for employees of companies and may not include taxes owed by those who are self-employed, pay the alternative minimum tax or some other situations.
Here are the most common situations that can affect your taxes one way or the other:
New job. Many times, your salary changes when you get a new job. To ensure your employer is withholding the current amount, you’ll want to fill out a Form W-4, also known as the Employee’s Withholding Allowance Certificate. Give that to your new employer. You can use the IRS Withholding Calculator as a tool as well to ensure your tax payments are going as planned for the year.
Side job. If you earn income in the gig economy – as a freelancer or contractor in a situation where your employer does not withhold taxes – you’ll want to be paying estimated tax. That’s a quarterly payment to the IRS that ensures you’re paying enough taxes. Estimated taxes may also apply if you’re self-employed or own your own business. Estimated taxes are normally paid quarterly (four times per year), and you can use Form 1040-ES to figure out how much you should pay.
Weddings, Children and Life Events. Certain life events, including getting married or divorced, having children, selling or buying a home and more can trigger big changes in your taxes. If you’re employed, you may want to submit a revised W-4 form to your employer. If you’re paying self-employment taxes, you’ll also want to adjust accordingly. The IRS website has resources to help you recalculate the proper amounts.
Marketplace. With the Affordable Care Act, you need to remember to report changes in your circumstances (including income, family size and residence) to the Health Insurance Marketplace you are using for healthcare. If you get advance payments of the premium tax credit, this is particularly important to ensure you aren’t getting paid too much or too little in financial assistance.
IRS Publication 505 is a great resource for understanding what you may owe and why, and making that annual autumn check to make sure you’re paying the right amount. Avoiding a tax-time surprise is always a smart financial move.