As a young physician my income has been changing rapidly and, come to find out, I wasn’t withholding enough. It’s more complicated though, and I have learned a great deal about tax code and tax reform while researching the “why.” By Chelsea Altinger Casey, MD
“Inaccurate withholding can lead to an unpleasant surprise come Tax Day,” said Gregory J. Anton, CPA, CGMA, chair of the AICPA’s National CPA Financial Literacy Commission. This was the first thing I read when I searched “unexpected tax bill” this past April. I had a tax bill last year too, but nowhere near the balance due this year and failed to act wrongly assuming it would work itself out. What happened?
(PSA: I encourage you to check out tax definitions here before reading further!)
Come to find out, 45% of tax filing Americans do not know when they last updated their withholdings, according to a survey from the American Institute of CPAs. There have been several changes to withholdings over the past three years and it has been found that many Americans have not been adjusting, accordingly, including myself. More on that, here. If you are on the other end, you may have overshot your target and while receiving a tax refund may leave you feeling excited, the cost of letting the IRS hold your money interest free leaves a lost opportunity. It was a relief to know I was not leaving an interest free loan to the government on the table, and I was fortunate it was penalty free. Also having the funds available to pay made the blow tolerable. I want to dive into when and how to review your W4 and bust some common myths surrounding the W4 form, as well as broaden your tax IQ. My goal in this brief overview is to give you the financial literacy in cliff note form to review your withholdings and make the necessary changes to avoid a tax bill.
When and how to review
When starting a new job, you typically complete Form W-4, dictating how much your employer needs to withhold from each paycheck for federal taxes. Many wrongly assume it is a one-time activity. Embarrassingly, I have not checked my W-4 in over 3 years, since I started as a new faculty. Why would I? I had no major life changes, and assumed things were stationary, and was planning for a reasonable, penalty free tax bill. Going forward, you should revisit your W-4 at least once a year, and particularly after filing taxes. It would be prudent if you are in a situation of over or underpaying to check in quarterly using the IRS tax withholding estimator or the resource mentioned on Turbotax.
Adjust withholding and IRS tax withholding estimator
Top reasons to adjust your withholding:
Ultimately, what my husband and I will end up doing is consider the amount owed, divide by 12, and add on each of our W-4, as extra withholdings. I will check in 3-4 times this year using the tax calculator on the IRS site to see how close we can get. The goal is to not overpay. Finally, keep your tax money safe. If you owe on April 15, either deliberately or accidentally, you will need to square up. Staying ahead will prevent this problem going forward.