This is really a two-part question, the first part being how do I make sure I have withheld the proper amount based on my estimated tax liability at year end?

Step one – assume no changes in your tax deductions, credits, etc.  Then check your income tax withholdings to-date.  Most people leave this task until they work through their year-end return, however, now is the time to determine how much money you have already paid the IRS and estimate how much more you might owe.  Remember, a large refund means you have lent your money to the government instead of keeping it in your bank account!

Has your filing status changed during the year (married, divorced, children)?  Have you, or do you expect to receive any bonus pay before year-end where federal or state taxes will not be withheld?  Are you self-employed, expecting a material fluctuation in earnings for 2024?  Also, consider your prior year’s tax return; did you receive a large refund or pay a large amount due?

Another objective when reviewing your tax payment status before year end is avoiding any underpayment penalties.  According to the IRS, “In most cases, you must pay estimated tax for 2024 if both of the following apply. 1. You expect to owe at least $1,000 in tax for 2024, after subtracting your withholding and refundable credits. 2. You expect your withholding and refundable credits to be less than the smaller of: a. 90% of the tax to be shown on your 2024 tax return, or b. 100% of the tax shown on your 2023 tax return. Your 2023 tax return must cover all 12 months”.

So how should you approach this?  The easiest method is to look at your YTD earnings and withholdings statement, which (depending upon your employer) may be included in your most recent W-2 statement or be available upon request from your employer (self-employed taxpayers can follow the same process using a projection of earnings and expenses).  Project this to 12/31/24 for an estimate of where you will stand at year-end.

p.s. – the IRS also has a tax withholding estimator that is free of charge, however, it has a more in-depth Q&A, and is a bit more time consuming.  See below link.

https://apps.irs.gov/app/tax-withholding-estimator

Step two – factor in any changes you plan to make that will affect your deductions and credits for the year. Here is the difference between the two.

Tax credits directly reduce the amount of tax you owe, giving you a dollar-for-dollar reduction of your tax liability.  These would include items such as the Child Tax Credit, Lifetime Learning Credit, American Opportunity Credit, etc.

Tax deductions reduce how much of your income is subject to taxes. Deductions lower your taxable income by the percentage of your highest federal income tax bracket. So, if you fall into the 22% tax bracket, a $1,000 deduction saves you $220.  Examples of tax deductions would include things such as itemized deductions (if applicable), retirement contributions, contributions to Health Savings accounts, student loan interest payments, etc.

Depending upon the complexity of your situation, it may benefit you to employ the services of a professional tax preparer for guidance.  I will also be posting a more in-depth review of tax planning considerations soon, so stay tuned!