Paying too much or too little in taxes calls for a review of your withholding. If you paid too much in taxes, you essentially gave an interest-free loan to the IRS. If you paid too little, you risk owing back taxes.
The 2016 tax season starts on January 19. Before that, you may estimate your tax liability to pay the correct amount to the IRS.
Did I Pay the Correct Amount?
An easy method to figuring out if you paid more or less in taxes is to consider changes that impacted your tax bill. You may want to check your withholding if you experienced the following:
- Rise in income (promotion, change of job, bonus, prize money, windfall gain)
- Fall in income (loss of employment, theft, natural disasters, capital loss)
- Increase in expenditure (birth of a child, marriage, medical expenses, college fees)
- Decrease in expenditure (a child moving out, divorce, change in lifestyle)
You may also calculate your tax liability using both the standard deduction and itemized deduction. If your income increased, check for deductions to lower your tax bill.
Withholding Too Much
Getting extra taxes withheld means depositing the excess amount to the IRS until they return it back to you in the form of a refund. If you received a large refund last tax season, you need to check your withholding (if you are an employee) or calculate your tax liability carefully (if you are self-employed or run a business).
Withholding Too Little
It’s never a good idea to pay less in tax than you are required to. After the deadline for the payment of taxes, the IRS begins to charge a penalty and interest on the balance to be paid. If you believe you paid too little throughout 2015, you may want to be begin saving now to cover your liability. If you cannot pay the entire amount in a lump sum come April 18th, you may be able to pay the amount in monthly installments.