The Internal Revenue Service says now is the perfect time for taxpayers to review their tax withholding and payments to avoid a surprise when filing next year.
An adjustment or two made now may boost take-home pay or allow taxpayers to pay more in the last quarter of 2020 to avoid a surprise tax bill, according to an IRS news release.
Some Things to Consider That Will Affect Taxes Owed in 2020 Include:
- Coronavirus tax relief – Tax help for taxpayers, businesses, tax-exempt organizations, and others – including health plans – affected by a coronavirus (COVID-19).
- Disasters such as wildfires and hurricanes – Special tax law provisions may help taxpayers and businesses recover financially from the impact of a disaster, especially when the federal government declares their location to be a major disaster area.
- Unemployment compensation – Millions of Americans got taxable unemployment compensation, many of them for the first time. Taxes can be withheld from their benefits.
- Job loss – IRS Publication 4128, Tax Impact of Job Loss PDF, explains how this unfortunate circumstance can create new tax issues.
- Workers moving into the gig economy due to the pandemic – IRS advises people earning income in the gig economy to consider quarterly estimated tax payments to stay current.
- Life changes such as marriage or childbirth – Getting married or having a child are just a couple of life events that can affect your refund or how much you owe.
Pay As You Go
Taxes are generally paid throughout the year whether from salary withholding, quarterly estimated tax payments, or a combination of both. About 70% of taxpayers, however, over withhold their taxes every year which typically results in a refund. The average refund in 2020 was well over $2,400.
Taxpayers can pay electronically, throughout the year, online, by phone, or with a mobile device and the IRS2Go app. They can choose an electronic payment option to schedule estimated tax payments and receive email notifications about their payments.
Taxpayers can also visit IRS.gov/account to view their taxes owed, payment history, and key tax return information from their most recent tax return as originally filed and, if they have one, they’ll see details about their payment plan.
IRS reminds people that many factors affect the timing of a refund. The fastest way to get a tax refund is by filing electronically and choosing Direct Deposit. IRS issues most refunds in less than 21 days, but it’s possible it can take longer.
Tax Withholding Estimator
The IRS launched an improved Tax Withholding Estimator tool last summer to make it easier for everyone to have the right amount of tax withheld during the year. This is especially important for anyone who faced an unexpected tax bill or a penalty when they filed this year. It’s also an important step for those who made withholding adjustments in 2020, had a major life change, or were adversely affected by the pandemic, it said in the news release.
The tool offers workers, as well as retirees, self-employed individuals, and other taxpayers, a more user-friendly step-by-step tool for effectively tailoring the amount of income tax they have withheld from wages and pension payments.
The tax withholding estimator has several key features for ease of use:
- The plain language throughout the tool to improve comprehension.
- The ability to more effectively target at the time of filing either a tax due amount close to zero or a refund amount.
- A progress tracker to help users see how much more information they need to input.
- The ability to move back and forth through the steps, correct previous entries, and skip questions that don’t apply.
- Enhanced tips and links to help the user quickly determine if they qualify for various tax credits and deductions.
- Self-employment tax for a user who has self-employment income in addition to wages or pensions.
- Automatic calculation of the taxable portion of any Social Security benefits.
- A mobile-friendly design.
Also, the new Tax Withholding Estimator makes it easier to enter wages and withholding for each job held by the taxpayer and their spouse, as well as separately entering pensions and other sources of income. At the end of the process, the tool makes specific withholding recommendations for each job and each spouse and clearly explains what the taxpayer should do next.
For more information about taxes, estimated taxes, and tax withholding, see IRS Publication 505, Tax Withholding and Estimated Tax at IRS.gov.