One of life's challenges seems to be calculating what you'll owe in taxes the following April. There are several tools available for you to use including one of favorites right from our friends at the IRS:
https://www.irs.gov/individuals/tax-withholding-estimator
Using this IRS tax withholding calculator for married couples or individual taxpayers with both employee wages and self employment income will generate a W-4 that you can send to your employer's payroll department. Often an employees payroll is calculated without the payroll department factoring in your "better half's" income or your own "side gig income." This means that the payroll folks might be calculating your tax withholding at a lower tax bracket (say 12% when your extra income ends up being in the 22% or 24% bracket).
You can also fill out the "old fashioned" paper W-4 as shown below, however this is a more manual way to calculate your tax withholding requirements than using the online calculator mentioned above. See the graphic below:
Estimated Tax Vouchers:
Simply using the tax vouchers printed out with your prior year tax return can help you stay ahead of an unfortunate tax bill. While this is not precise, what it does is generally keep you in line with the Safe Harbor tax rules. The IRS defines Safe Harbor as having paid enough tax during the year to meet certain requirements to avoid penalties and interest.
Notice there are a couple different scenarios to consider:
- The safest option to avoid an underpayment penalty is to aim for "100 percent of your previous year's taxes." If your previous year's adjusted gross income was more than $150,000 (or $75,000 for those who are married and filing separate returns last year), you will have to pay in 110 percent of your previous year's taxes to satisfy the "safe-harbor" requirement. If you satisfy either test, you won't have to pay an estimated tax penalty, no matter how much tax you owe with your tax return.
- If you expect your income this year to be less than last year and you don't want to pay more taxes than you think you will owe at year end, you can choose to pay 90 percent of your estimated current year tax bill. If the total of your estimated payments and withholding add up to less than 90 percent of what you owe, you may face an underpayment penalty. So you may want to avoid cutting your payments too close to the 90 percent mark to give yourself a little safety net.
- If you expect your income this year to be more than your income last year and you don't want to end up owing any taxes when you file your return, try to make enough estimated tax payments to pay 100 percent of your current year income tax liability.
Tax Planning Software:
For tax return review, tax planning, and tax projections we use an in-house software tool called HolistiPlan to prepare reports and analyses to identify tax opportunities and potential tax isues. We rolled this software out late last year and found it very useful this past tax season. We look forward to continuing to enhance our capabilities to help our clients save money in taxes, avoid tax problems, and optimize the tax code to their benefit. For more information about this great tool, here's a link to their website: https://www.holistiplan.com/
Additional Thoughts about Maryland Tax Withholding:
If you are consistently owing Maryland money during tax time, it's possible that your payroll department is unaware of our local tax on top of the Maryland state tax amounts. In Montgomery County, that's an additional 3.20% of your State income that is sometimes overlooked from your paycheck withholding. Here's a link to the Maryland tax website: https://www.marylandtaxes.gov/individual/income/index.php