Did You Overpay or Underpay Your Taxes?

Most people enjoy getting a big refund at tax time, but a refund is an interest-free loan to the federal government, and you may prefer to have that money during the year. On the other hand, no one enjoys owing taxes, and underpaying might trigger a penalty beyond the tax you owe. If you overpaid or underpaid by a significant amount in 2019, this may be a good time to adjust your withholding or estimated tax payments for 2020.

You can check your withholding for 2020 by using the IRS Tax Withholding Estimator at irs.gov/individuals/tax-withholding-estimator. You can adjust withholding by filing a new Form W-4, Employee's Withholding Allowance Certificate, with your employer. If you have taxes withheld by an employer and also have nonwage income, you may want to request additional withholding from your paycheck to cover taxes on the nonwage income.

If you want taxes withheld directly from Social Security benefits, complete Form W-4V, Voluntary Withholding Request, and mail or take it to your local Social Security office. You can elect to have 7%, 10%, 12%, or 22% of your monthly benefit withheld for taxes.

Estimated Tax Payments

Generally, you must pay federal estimated tax for the current year if: (1) you expect to owe at least $1,000 in tax after any withholding or refundable tax credits, and (2) you expect your tax withholding and refundable tax credits to be less than the smaller of (a) 90% of the tax on your tax return for the current year or (b) 100% of the tax on your tax return for the previous year (110% if your adjusted gross income for the previous year was more than $150,000, or $75,000 if you were married and filed a separate return for that year). There are different rules for farmers and fishermen.

You can use Form 1040-ES, Estimated Tax for Individuals, and its worksheets to determine the amount you should pay for the year through withholding and estimated tax payments to avoid paying a penalty. The year is divided into four payment periods. If your income is fairly even throughout the year, you will typically owe one-fourth of your annual estimated tax by the due date of each payment period. If your income changes significantly or varies during the year, you may have to recalculate or use an annualized method. If you don't pay enough during any payment period, you may owe a penalty for that period even if you are due a refund when you file your tax return.

Withholding and estimated tax payments may also be required for state and local taxes. If you have questions about withholding or estimated payments, you may want to consult a tax professional.