Did you get a sizable tax refund last month, as in, thousands of dollars? Or did you owe the IRS more than, say, a thousand dollars? For the average taxpayer, being that far off your actual tax due is a sign that you’re either overpaying or underpaying your federal taxes. Although many people still rely on a hefty tax return as a savings vehicle or a vacation fund, as CPAs, we always advise clients not to pay more tax throughout the year than they need to. It’s like you’re giving money away.
To achieve a better balance of tax due to tax paid, you may need to adjust your withholding. Besides meeting with one of our CPAs to design a personalized estimated tax plan for you, here’s what you can do at home to ensure you’re not paying too much, or too little.
Which Tax Bracket Are You In?
You first need to understand where you fall under the new tax brackets, which took effect this year. Here’s a table so you can see where you stand.
| Single | Married Filing Jointly | Married Filing Separately | |
| 10% | $0 to $9,525 | $0 to $19,050 | $0 to $9,525 |
| 12% | $9,526 to $38,700 | $19,051 to $77,400 | $9,526 to $38,700 |
| 22% | $38,701 to $82,500 | $77,401 to $165,000 | $38,701 to $82,500 |
| 24% | $82,501 to $157,500 | $165,001 to $315,000 | $82,501 to $157,500 |
| 32% | $157,501 to $200,000 | $315,001 to $400,000 | $157,501 to $200,000 |
| 35% | $200,001 to $500,000 | $400,001 to $600,000 | $200,001 to $300,000 |
| 37% | over $500,000 | over $600,000 | over $300,000 |
The personal exemptions were eliminated and the standard deduction is $12,000 for single and married filing separately taxpayers, and $24,000 for married filing jointly. When figuring your taxable income, make sure to factor in anything that reduces or increases your taxable income, like retirement distributions or qualified contributions to retirement accounts, for example.
Allowances on Your W-4
You can update your Form W-4 with your employer at any time throughout the year. To do this, not only will you need to figure if additional tax withholding is necessary (see above), but also how many allowances to claim. The more allowances you have, the less tax you pay.
Each W-4 has a worksheet to help you determine the allowances you qualify for. Factors like relationship status, dependents, filing as head of household, and other tax situations affect your allowances. Just because you can claim four allowances, however, doesn’t mean you have to. For example, if you maintain a part-time freelance job on the side for which you don’t pay taxes. You may elect one or zero allowances on your W-4 so the additional tax comes out of your regular paycheck.
Social Security and Medicare
You are required to pay 6.2 percent of your income to social security, but after $128,700 in wages, the social security tax phases out. For Medicare, you must pay 1.45 percent of wages up to $200,000, and 0.9 percent on wages above $200,000. Once you hit these thresholds, double check your paystubs to be sure you’re taxed properly.
Periodically reviewing your W-4 is a good idea, especially if you change jobs, get a promotion, expand your family, or no longer claim dependents. Even though a financial windfall every spring might seem like a good idea, adjust your tax withholding to keep more of what you earn every paycheck. The IRS has a withholding calculator you can use to determine if what you’re paying in taxes based on earnings is still accurate.
You can always contact our office anytime for a review of your tax situation or a plan for estimated taxes