While many of our clients worry they may owe more than they expected, there are some that even dread their refund. Getting a large refund often indicates that you withheld too much of your pay during the year and essentially gave the IRS an interest free loan.

Federal Withholding

Speak to your employer about adjusting the federal withholding (reported in box 2 of your Form W-2) which can help reduce this refund and allow you to take home more of your paycheck. On the other hand, increasing your withholding may be necessary to reduce your tax balance due and eliminate or reduce underpayment penalties for not having enough withheld.

Learning how to calculate the perfect amount of withholding to break even can be tricky. The IRS has a tax withholding estimator tool on its website that taxpayers can use to help determine the ideal amount of withholding: https://www.irs.gov/individuals/tax-withholding-estimator. 

Retirement Contributions

Another factor related to wages that can impact your tax liability are your retirement contributions. There are many different types of retirement plans that may be available to you – 401(k), 403(b), 457(b), Traditional IRA, and Roth IRA just to name a few. Some options will reduce your taxable wages in the year you contribute, thus reducing your tax liability now, while others will be tax free when you take distributions which may reduce your tax liability in future years.

The best results for retirement savings often occur when the savings start early and are done consistently from year to year. Most retirement plans have the same goal: to have enough in your pocket to live comfortably when you’re retired.

Catch-Up Provisions

If you are worried that you have started too late and cannot contribute enough each year, check with your accountant to see what the annual limitation is for your plan. For taxpayers aged 50 and above, the IRS allows for additional catch-up contributions ranging from $1,000 – $7,500. There is also a new $3,750 super catch-up provision for certain taxpayers aged 60-63 which is effective beginning in tax year 2025.

Reach out to your KT Tax Advisor today to see what you should be withholding or taking home and get the most out of your tax return!