The federal income tax is a pay-as-you-go system. Employers generally withhold tax from workers’ wages; however, taxpayers often have taxes withheld from certain other income including pensions, bonuses, commissions, and gambling winnings. Individuals who do not pay tax withholding, like the self-employed, as well as those who earn income such as dividends, interest, capital gains, rent, and royalties are normally required to make estimated tax payments.
Be aware of the following to avoid tax-time surprises!
- New Job. When starting a new job, an employee must fill out a Form W-4, Employee’s Withholding Allowance Certificate. Employers use this form to calculate how much federal income tax to withhold from regular pay, bonuses, commissions, and vacation allowances. This is the time to review the number of exemptions you will claim, which is turn impacts how much or how little is going to be withheld from your pay for your federal income tax obligation.
- Estimated tax. People who have income not subject to withholding may need to pay estimated tax. Those expecting to owe $1,000 or more than taxes withheld from their wages or other sources of income, may also need to make estimated tax payments to avoid underpayment penalties.
- Life Events. A change in marital status, the birth of a child, or the purchase of a new home can change the amount of taxes a taxpayer owes.
- Increase in income. With the increase in income comes the possibility that a portion of that increased income gets taxed at a higher rate, so be aware of the various tax brackets and income levels to determine if the increase in income changes the income tax bracket you are in.
- Change in exemptions and/or deductions. Just as an increase in income can impact and change your tax position, so can a change in exemptions or deductions. Consideration should be given to the impact that a child who may no longer be eligible to be claimed as a dependent, the impact of itemized deductions not being at the same level as prior year or switching to a standard deduction that would be lower than the itemized deductions claimed previously.
In addition to the five items listed above, a “bonus item” for you is to be aware that tax laws change.Generally there are changes from year to year, whether minor changes for inflationary adjustments or more significant changes in treatment income or deductions. Either way, do not assume that the rules that applied in the previous year apply the in the current year.
Over the course of a year, any of the above can cause some people to get a larger refund than expected while others find they owe more tax.So just be aware, so that you do not have any unexpected surprises when it is time to file your tax return.
For any questions regarding tax withholding or any other tax related questions, always consult a Certified Public Accountant. Submitted by: Dennis K. Gallant, CPA, Senior Manager, Tax Services, Thomas Howell Ferguson P.A. CPAs, email@example.com, (850) 668-8100.