For Mark Roberts’ Use: Yes, we’re a few months away from tax season, but that doesn’t mean you shouldn’t think about it ahead of time. In fact, a little preparation now can help to prevent unpleasant surprises next spring. One quick step can help you understand your current tax situation right now, so that you can make any necessary adjustments before the end of the year.
Head over to the IRS website and use their Tax Withholding Estimator tool. After you answer a series of questions (it shouldn’t take more than a couple of minutes) the tool will generate an estimation of your taxes along with a suggestion for your regular paycheck withholding.
If the numbers from the tool approximately match up with your regular withholding, you don’t need to do anything else. But if it looks like you’re not having enough withheld from paychecks or pension disbursements, this could be a sign that you’ll end up owing money in the spring.
At that point, you have two choices: Brace yourself for the amount due when you file your taxes, or simply increase your withholding now. Keep in mind, though, that you need to consider all the previous months this year. If your withholding fell short, you will owe for that time period as well. So this isn’t just a matter of increasing withholding from this point forward.
You might also wonder if you can increase your withholding simply for the purpose of earning a tax refund later. Technically you can do this, but why would you want to? You’d essentially be giving Uncle Sam an interest-free loan until next April. That money could be put to better use in an interest-bearing savings account instead.
Remember, even if you’re retired, you can use this tool to estimate withholding for pension payments or other taxable income. It’s a great way to prevent tax surprises throughout retirement.
Try the tool, and call your human resources department at work (or at your pension plan administrator) to make any necessary adjustments to withholding. And if you have any other questions about financial planning or establishing non-taxable income for retirement, give us a call.
