A failure to adjust your tax withholding can lead to serious problems. Your tax withholding impacts how much tax the Internal Revenue Service (IRS) and state tax authorities take out of your paycheck. The government expects taxpayer to pay their tax obligations throughout the year.
What happens if you do not pay 90% of your tax obligation throughout the year?
If you get to the end of the tax year and owe more than 10% of your tax bill, the IRS may charge additional penalties. This could result in an unmanageable tax bill. There are some exceptions, such as this year when the IRS chose to make changes to this general rule to account for the impact of the new tax law.
How can I avoid these tax penalties?
It is important to change your tax withholding status as needed. In some cases, this may require action during the year, not just when a new year begins. Some red flags that indicate you may need to actively change your withholdings include:
- Change in marital status. Whether you just got married or divorced, a change marital status generally signals a need to change your withholding.
- Growth of the family. Those who welcome a child through birth or adoption will also likely need to review their withholding to ensure it meets their tax requirements.
- New income. You should also review your status if you get a new job, add in a side job or otherwise experience a change in income.
It is also important to review your withholding if you receive a large refund. Although you want to make sure you pay the majority of your tax obligation to avoid penalties, you do not want to pay too much. That money could be earning you more through a savings account or other investment strategy.
To change your withholding, file a new W-4 with the IRS.