By Tom Ozimek
The Internal Revenue Service (IRS) has issued an alert to taxpayers, encouraging them to adjust their 2024 withholding so as to either avoid effectively giving the government an interest-free loan of their money or face the prospect of penalties and interest if too little tax is withheld.
The IRS said on Nov. 3 that with the end of the year fast approaching, taxpayers should review their tax withholding as soon as possible in order to “avoid a potential surprise” when they file their tax returns in 2024.
“Although it’s best for taxpayers to verify withholding early in the year, an adjustment made in the final weeks of 2023 could still help to avoid an unexpected result, such as a big refund or a balance due, when filing taxes next year,” the IRS said.
Having too much tax withheld and waiting for a refund at tax time is akin to giving the government an interest-free loan. The IRS estimates that roughly 70 percent of taxpayers withhold too much every year, resulting in a refund at tax time.
However, if a taxpayer does not have enough taxes withheld from their paychecks throughout the year, they may owe a balance when they file their taxes. This means they will have to pay the remaining balance of taxes owed to the IRS when they file their tax return.
Owing a balance at tax time can be a significant financial burden, especially if the balance is large or if the taxpayer is struggling to make ends meet.
There are also penalties and interest that may apply when the taxpayer owes a balance when filing their taxes. The IRS charges interest on any unpaid taxes starting from the original due date of the return. Penalties may also be assessed if the taxpayer fails to file their return on time or if they owe taxes and fail to pay them by the deadline.
Owing a balance can also have negative effects on credit score as it is considered a debt that is unpaid. This can also lead to wage garnishments, liens on property, and even imprisonment if the taxpayer fails to pay their taxes.
There’s an online tool, the Tax Withholding Estimator, that wage-earning taxpayers can use to determine if they have too much or too little tax withheld from their paychecks.
The estimator lets taxpayers figure out if they will receive a refund or need to make a payment to the IRS in order to avoid owing taxes and potentially incurring penalties the following year.
Quarterly Estimated Tax Payments
The way taxes are paid in the United States is on a pay-as-you-go basis, which means that taxes are paid as income is earned throughout the year. This is typically done through withholding from paychecks, pension payments, Social Security benefits, and certain other government payments.
However, for people who earn income that’s not subject to withholding—such as income from self-employment, unemployment, annuities, the gig economy, or digital assets—they may consider making quarterly estimated tax payments to the IRS.
This is to ensure that they are paying enough taxes throughout the year and to avoid owing a balance (or having a large balance due) when they file their taxes.
Estimated tax payments can be made via Form 1040-ES or through their online accounts, where payment histories and other tax records are visible.
Revised Retirement Contribution Limits
In a recent update, the IRS said it has raised by $500 the contribution limits for retirement plans like a 401(k) or an individual retirement account (IRA), which can help taxpayers boost their tax-free savings.
“The contribution limit for employees who participate in 401(k), 403(b), and most 457 plans, as well as the federal government’s Thrift Savings Plan, is increased to $23,000, up from $22,500,” the IRS said on Nov. 1.
The limits on annual contributions to an IRA plan have been increased from $6,500 to $7,000.
However, the catch-up contributions for both retirement accounts remain at the same level. For IRA accounts, the catch-up contribution is set at $1,000 for 2024, while for a 401(k), it’s $7,500.
Catch-up contributions let individuals aged 50 and above make additional contributions to their IRA or 401(k) accounts. The rules allowing catch-up contributions exist in order to bolster the retirement savings of older individuals because the closer they are to the age of retirement, the less time they have to grow their assets.
While the IRS has boosted contribution limits for retirement savings accounts, recent data from the Bank of America shows that a growing number of Americans are withdrawing money from their retirement accounts because they’re suffering financial hardship.
According to the Bank of America analysis, 15,950 people made a hardship withdrawal from their 401(k) accounts in the second quarter of this year, up 12 percent from the first quarter and up 36 percent from the third quarter of 2022.