As 2023 draws to a close, the Internal Revenue Service (IRS) has issued a call to action for taxpayers to reassess their withholding settings, a proactive step that could spare many from unforeseen tax bills or overpayments in 2024.
In a November 3rd advisory, the IRS underscored the importance of this review, emphasizing that a year-end adjustment, although late in 2023, could prevent the dual extremes of an inflated refund or an unexpected balance due when filing taxes. This guidance comes with the revelation that approximately 70 percent of taxpayers traditionally over-withhold, leading to refunds that essentially amount to interest-free loans to the government.
"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 agency said.
Conversely, the sting of under-withholding is not to be underestimated. Taxpayers who find themselves on this end of the spectrum risk facing a significant financial hit come tax season, which could be exacerbated by penalties and interest for unpaid taxes accruing from the return's original due date. Beyond the immediate financial impact, such tax debts can also have lasting repercussions on credit scores and, in severe cases, may result in wage garnishments, property liens, or even imprisonment.
To assist taxpayers in navigating these calculations, the IRS points to its Tax Withholding Estimator—an online tool designed to help wage earners determine their optimal withholding amount. The tool provides tailored recommendations to ensure taxpayers neither owe nor overpay.
In addressing the pay-as-you-go tax structure, the IRS acknowledges the unique position of individuals with income not automatically subject to withholding. From the self-employed to participants in the gig economy, these taxpayers are advised to make quarterly estimated tax payments to avoid owing a balance at filing time. Payments can be made through Form 1040-ES or via the IRS online portal, which provides access to payment histories and tax records.
Complementing the guidance on withholdings, the IRS has also announced an increase in the contribution limits for retirement savings accounts for 2024. In a bid to encourage taxpayers to enhance their retirement savings, limits for 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan have been raised to $23,000—an increase of $500. IRA contribution limits have seen a similar hike, going from $6,500 to $7,000. However, catch-up contribution limits for these accounts remain unchanged.
This move to bolster retirement contributions stands in stark contrast to recent data from the Bank of America highlighted by the Epoch Times, which has indicated a distressing trend of growing hardship withdrawals from 401(k) accounts. The uptick—36 percent higher than the same time last year—signals that despite the IRS's incentivizing higher savings rates, financial hardships are compelling a significant number of Americans to dip into their retirement funds prematurely.