06 May How can I stop owing the IRS every year?

Q. I end up owing money to the IRS and to the state every year. I know there are online withholding calculators but they never seem to be accurate enough that I don’t owe. How can I do better to break even every April 15?
— Tax tired

A. Breaking even, or coming close to it, at tax time is a terrific goal.

Depending on the specifics of your situation, you may find it to be a moving target every year. That’s why the withholding calculators may not work well for everyone.

There are a variety of reasons a taxpayer can owe at tax time, including non-recurring sources of income such as capital gains from sale of investment securities or other property, said Michael Maye, a certified financial planner and certified public accountant with MJM Financial in Gillette.

He said an underpayment situation could also happen for high-earning corporate employees who receive a large bonus.

“For bonus payments, federal taxes are withheld at a federal rate of 22%,” he said. “So, if the taxpayer’s actual federal marginal rate is 37%, that is a 15% under withholding for every dollar of the bonus.”

One of the easiest ways to remedy the chronic underpayment situation is to make quarterly federal and state estimated tax payments, Maye said, noting this is a situation where it can be beneficial to work with a tax professional.

“They can prepare a tax projection base on types of income as well as non-recurring items like a large capital gain,” he said. “As better information becomes available during the tax year, the tax projection can be updated and quarterly tax payments revised as needed.”

It is more important to avoid underpaying income taxes these days due to the higher interest rate environment we are now in, Maye said.

“With higher interest rates comes a higher underpayment penalty,” he said.

And no one wants to pay that.

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This story was originally published in May 2024.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.