Now that tax season has come and gone (unless you filed an extension), it’s a good time to assess the amount of income tax withheld from your paycheck. In fact, any time there is a major change in your overall tax situation, withholding amounts should be examined.
For your 2022 return, are you due a nice-sized refund? That might be exciting news, but hold on a minute. While everyone loves getting a big check, the reality is that this is your money, and you’ve overpaid your tax bill. So, in effect, you’ve given an interest-free loan to the government. If you had paid your tax liability more accurately, you could have taken the difference and invested it.
If you put that savings in a money market account, which currently pays about 3-4% interest, think about the extra earnings you could have accrued.
On the other hand, if you owed money on your 2022 return, you’ve now got a tax bill and may be in a bad spot trying to figure out how to pay it. You need to be sure you’re accurately forecasting your situation and withholding appropriately to avoid this potential financial nightmare.
The IRS guidelines say taxpayers should pay at least 90% of their tax liability through withholding (for W-2 employees) or estimated payments (for self-employed individuals). But it takes expertise and planning to get to the right withholding amount.
We can help you look at your overall tax picture and make an informed withholding decision.