Avoid tax surprises with a simple review
With tax season in the rear view mirror, now is the time to take a hard look at your federal and/or state withholdings to ensure next year's tax bill does not surprise you.
A review is more important than ever
There are a number of tax code changes that will impact the amount of tax you pay next year. So much so, that if you do not forecast your tax obligation now, you may be in for a very unpleasant surprise. This is true because:
No more advance payments for the Child Tax Credit. The one year requirement of the IRS to pay out half of the Child Tax Credit in advance is no longer in place. So you will not only need to plan for this change, it will also impact your tax return.
Child Tax Credits are lower. In addition, the Child Tax Credit amount for each child is rolling back to the 2020 dollar amount of $2,000. This could mean as much as $1,600 in lower credits for each of your children.
Dependent care credits are lower. The dependent care credit is also lower in 2022. So if both you and your spouse work and have daycare expenses, you will need to forecast the impact of this on this year's tax obligation.
New 1099-K reporting may require estimated tax payments. The IRS will be receiving millions of new informational tax forms reporting activity from those using digital payment platforms. So for those reselling event tickets, using sites like eBay, Esty and Amazon, you will now need to account for all this income. It may now require quarterly estimated tax payments throughout the year.
Be aware of life events. In addition, a change in your situation could create the need to review your withholdings. It could be due to a job change, selling or buying a home, getting married or divorced, or having a birth or death in the family. Whatever the cause, be aware of the potential change and put a sharp pencil to revising your withholdings.
High inflation is impacting everything. Finally, consider the impact of inflation on your situation. This is especially important if you have a small business as higher costs of labor and supplies could dramatically impact your pending tax bill.
Calculating and making adjustments
Using the IRS calculator. The IRS has an online tool to help you calculate how much you will need to withhold. In order to get an accurate reading, you need to have a copy of your latest paycheck or last quarterly estimated tax filing (Form 1040 ES) and a copy of your last tax return.
The IRS tool is here: IRS Withholding Calculator
Simply follow the tool's instructions and compare the tool's recommendation to your current withholdings.
Get expert help if necessary. The IRS recently changed the way it calculates recommended withholdings. While the intent is well intended, many are confused by the change. It is always a good idea to call to review your situation if you have any doubts. But do it now, while there is plenty of time in the year to build the proper withholding amount.
File a new withholding form with your employer. Whether you're paying too much or too little, you can fix it by filling out a new W-4 form and giving it to your employer. If you're filing quarterly estimated taxes, you can adjust your next quarter's estimate in a similar way.
In a perfect tax world, you would not owe too much nor get too large of a refund. Think of overpayments as an interest-free loan the government borrowed from you. Conversely, a shortfall means writing a large check when you file your tax return. That's a surprise few of us want.
"Tax Tips" are published to provide current tax information, tax-cutting suggestions, and tax reminders. If you would like more information on anything in "Tax Tips," or if you'd like to be on our mailing list to receive other tax information from time to time, please contact our office.
The tax information contained in this site is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance.
We are trusted CPA advisors servicing Burr Ridge, Hinsdale, Willowbrook, Darien, Naperville, and all Chicagoland area.
Do you need assistance with your business and/or personal tax returns? Would you like to have a trusted source for your accounting, allowing you additional time to focus on increasing your business? Do you use QuickBooks, or plan to in the future, for your accounting? We include these in all our service packages, customized to fit your personal or business needs.
We are currently accepting new clients. Your initial consultation is free, so you have nothing to lose and everything to gain. Our experienced staff is available to help you streamline your accounting, giving you more free time for yourself. Set up an appointment today by calling (630) 320-3720 or email us at email@example.com.
For more free resources, such as Tax Organizers, and Record Retention Schedules, access our website www.monarchaccountinggroup.com.
Mia Verc, CPA; Janice Papais, CPA
To better serve our clients and friends, to keep you up-to-date and informed, our blog is a resource for tax tips and overall accounting related articles. We hope you find this useful!