An unexpected tax bill can put a dent in your budget, especially after holiday spending. A year-end tax checkup can help you estimate a shortfall, make adjustments, and prepare while you still have options.
A Milford resident was unpleasantly surprised last year when she went to file her taxes, finding that she had a significant deficit in what she had paid in. Wanting to avoid any surprises this year, she contact the team at Merrimack Tax Associates to make sure her payments were on track.
Gather Your Current Numbers
To determine if you have been paying sufficient taxes throughout the year, pull together your latest pay stubs, last year’s tax return, and records of estimated tax payments. If you are married and file jointly, include your spouse’s information. List income that may not have federal taxes withheld: freelance work, interest, investment gains, rental income, and retirement distributions. Business owners should use estimated net profit rather than total sales. Include income you expect before December 31, such as a bonus or additional contract work. Your estimate will be more useful when it reflects the full year.
Check What You Have Already Paid
On your most recent pay stub, find year-to-date federal income tax withholding. Keep this separate from Social Security and Medicare taxes, which do not count toward your federal income tax prepayments. Estimate withholding from your remaining paychecks, then add any estimated payments you have made.
Use the IRS Withholding Estimator
The IRS Tax Withholding Estimator can help employees assess whether their withholding matches their expected federal tax bill. Have your records ready and enter current information, including other income and expected deductions. The results can help you decide whether to submit an updated Form W-4. If your situation involves substantial business income, investment transactions, or other complications, ask your accountant for a tax projection.
Look for Changes That Affect Your Return
Last year’s refund does not guarantee another one. A second job, higher business profits, or a spouse returning to work can change the calculation. Marriage, divorce, retirement, or a child no longer qualifying for a tax benefit can also affect your outcome. Review applicable deductions and credits rather than assuming everything carries forward unchanged.
Address a Shortfall Promptly
Employees may be able to request additional withholding through Form W-4. Check with payroll about processing time and how many paychecks remain. Self-employed taxpayers may need to adjust estimated payments.
Generally, taxpayers avoid the federal underpayment penalty by paying enough throughout the year to meet an applicable safe harbor. Common thresholds are 90% of current-year tax or 100% of prior-year tax, increasing to 110% for certain higher-income taxpayers. Meeting a safe harbor can prevent a penalty while still leaving a balance due at filing.
Make a Plan for the Balance
If you expect to owe, begin setting money aside now. Divide the projected balance into manageable amounts based on your remaining paychecks or monthly budget. Remember to review state taxes separately where applicable; a federal estimate does not cover every obligation.
A short conversation with your accountant before year-end can replace uncertainty with a practical plan. Gather your records, check your numbers, and address any gap while there is still time to act.
The Milford resident was able to sit down with the Merrimack Tax Associates team and review the taxes she had paid in so far for the year, making adjustment now to be sure she would not see another unexpected bill when it came time to file.