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KEY TAKEAWAYS
- If you owe more in taxes or receive a smaller refund than expected, you may withhold too little on each paycheck. You can adjust your withholdings by adjusting your W4 early.
- You can reduce your tax burden by contributing to traditional retirement accounts.
- Many people are eligible for more tax credit than they realize. Using software or hiring a professional to help with your taxes can save you money in the future.
You may need to use tax credits or deductions earlier rather than later if, when doing your taxes in 2024, you pay more than anticipated.
The experts recommend that you start checking your taxes early in the year. It will give you the opportunity to adjust your withholdings throughout the year, and plan for what you’ll owe at the end of the tax season.
“More and more, people should plan and get a feel for what their taxes look like throughout the year, whether they check it out themselves or talk with their professional three or four times," said Tom O’Saben, director of tax content and government relations for the National Association of Tax Preparers.
Adjust Your Withholdings To Create The Best Refund For You
If you are unpleasantly surprised by how much you owe in taxes or your tax refund, you may be withholding too much or too little.
Start by looking at your W4 and to know how much is being withheld on each paycheck. O’Saben recommends doing this as early as possible so that more of your paychecks are adjusted to suit your needs.
You may not have paid enough taxes on each paycheck if you owe more than expected. To increase your withholdings, you can claim less exemptions. You can also request your employer to take out more money each paycheck.
“It’s a lot easier to pay that on each payday than trying to come up with it at tax filing season,” O’Saben said.
Mahaffy said you may also want to ensure that you are not withholding too much so that you can use your money throughout the year.
"You don't want the government using your money for free," said Ed Mahaffy, certified financial planner and Chartered Financial Consultant. "If you have over-withheld, then you have to go seek a refund and they've been earning interest on your money for a year."
Withholding too little, on the other hand, can result in a tax penalty. If you haven’t paid enough taxes throughout the year, the Internal Revenue Service (IRS) may charge an underpayment penalty, which is typically the amount you owe plus 5% of the underpayment amount.
"Instead of approaching it on an ad hoc basis, sit down and say, 'This is what I suspect my income will be this year next year. Here's what's going on in my life,'" Mahaffy said.
Utilize Tax Deductions and Credits To Lessen The Amount of Taxes Due
Tax deductions take the tax exemptions that you qualify for and reduce your taxable income, allowing you to pay taxes on less income. O’Saben recommends keeping track of the exemptions that you qualify for in the 2025 year and possibly taking action to increase your exemptions.
For example, state and local governments may offer property tax exemptions for some homeowners, which will reduce the amount of property taxes they owe. Contributing to a traditional 401K or a traditional IRA would also reduce your taxable income.
While exemptions will reduce the income the government can tax, credits reduce the taxes you owe. Mahaffey said to do your homework on tax credits to lower your tax bill further.
For example, households using clean energy sources can take advantage of energy tax credits. Some states offer deductions or credits like the American Opportunity Tax Credit or the Lifetime Learning Credit for parents who are saving for their children’s higher education.
"I don't want to call them obscure, but it's just not the kind of thing you know as taxpayers do on a day-to-day basis," Mahaffey said.
Federal and state governments may grant tax credits to promote specific behavior or help out households. O’Saben recommends utilizing software or a professional to ensure you count all tax credits you qualify for and don’t end up paying more than you owe.
“I think sometimes people are fearful of the tax system … [but] software will help to take out some of those uncertainties," O’Saban said.
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