Most taxpayers see April 15th as the finish line. The tax return is finally filed; the stress fades and taxes are out of mind. At least until next year. But from a CPA’s perspective, May is an advantageous time to make an important tax move to adjust your federal withholding. In May you finally have the full picture, a completed tax return. Did you owe unexpectedly, or was your refund larger than normal? Did income from your side hustle or a bonus create a tax bill? Your return reflects how last year unfolded, and adjusting your tax plan in May is informed decision making.
Small changes now, early in the year, are easier than big fixes later. When federal withholding is adjusted early in the year, the correction is spread over many paychecks. This means smaller increases or decreases per paycheck and less impact on your monthly cash flow and budgeting. Plus, if you wait until the last quarter of the year to aggressively increase your federal withhold to avoid tax penalties and a large tax bill, you can strain your household budget during the holidays.
By May, tax season is over, but life keeps progressing. May is an ideal checkpoint to determine if the withholding on your paycheck reflects your current circumstances. You may have gotten married, had a baby, started a new job, or started a business. Any one of these can alter a taxpayer’s overall tax picture, so it is important your withholding aligns with the milestones you achieve.
Many of my clients reach out after tax season for guidance on adjusting their federal withholding. I typically start by requesting their latest paystub, and if they are married, their spouse’s paystub as well. For clients who own a business, I also review year-to-date income in combination with their W-2 wages to determine whether withholding on their paycheck should be increased or decreased. A CPA can guide taxpayers through filling out IRS Form W-4 to adjust federal withholding appropriately. In many cases it takes several iterations of the pay cycle, or fine tuning, to finalize the correct withholding amount and to avoid surprises at tax time.
During tax season the focus is compliance, filing tax returns timely, and abiding by IRS rules. Outside of tax season, that focus can shift to proactive tax planning. The month of May offers an opportune time to meet with a CPA to prevent financial stress later. Tax withholding is not something that should be set and forgotten. It needs to evolve as your life changes or as tax law changes. If last year’s tax return surprised you in any way, consider it a sign to review your next paystub. The sooner you act, the smoother next tax season will feel.
Carlee Gibbs, CPA is a staff accountant for Keller & Associates CPAs, PLLC.