You don’t have to wait for Uncle Sam to give you your tax refund next spring. There is a way to calculate how to keep this money throughout the year.
The 2021 tax season is over for most Americans. With Monday’s deadline for filing those federal returns, tens of millions of people will find they’re getting a big refund from Uncle Sam — money the government has been hoarding over the past year.
What if it didn’t have to be like this? What if people could find a way to navigate the confusing tax code and keep more of their paycheck throughout the year?
The Internal Revenue Service has an online tool called Withholding Tax Estimator to help do it. And even though we’re already 3.5 months away from tax year 2022, it’s not too late to start using it.
“This allows you, as a family, to reconcile the taxes you pay with what you actually owe by estimating how much tax you are going to owe throughout the year,” the spokesperson said. IRS, Raphael Tulino. “That way you can adjust it as the year progresses and not be too far off one way or the other when it comes to tax timing.”
Simply put, enter the correct information, then adjust the W-4 deductions accordingly. The result should be something close to zero at tax time, possibly paying a small amount or getting a small refund.
The tool was updated about three years ago as more people entered the gig economy and other factors, leading to adjustments in how that income had to be reported.
Tulino said the process takes about 20 minutes. The user will need all their necessary financial documents, such as pay stubs, for reference. Most of the questions the estimator will ask are similar to what to expect when filing taxes, including:
- Filing status, single or married
- If a dependent will be claimed
- Source of income
- Pay stub information such as how much was earned this year and how much was paid in taxes
- 401k, HSA and FSA dues
- Tax deductions and credits
It will not ask for personal information such as name, social security number, address, or bank account numbers.
“What you put in and what comes out is a rough estimate of what you’re going to owe in taxes throughout the year,” Tulino said.
The estimator can be used year-round, but Tulino said it’s best done earlier. Using it in subsequent months may not allow enough time to change deductions so that the taxpayer is close to zero.
The average refund this year is well over $3,000, Tulino said. Some Americans may want it that way, whether they plan to use that money for a specific purchase or just the peace of mind of knowing they won’t pay the IRS.
“But if you think about it, it’s money that could be in your pocket all year round. You don’t have to give the government that money to hold for you,” Tulino said.
He added that even if taxpayers use the estimator and still end up having to pay a small amount to the IRS, it still means they had access to what would have been their money in the tax year. imposition rather than expecting it.