What can I do to reduce what I owe on my IRS income tax return?
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UPDATED: Mar 18, 2021
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The trick is to withhold the exact amount necessary without withholding extra. While a refund is better than additional taxes due, it is still not an ideal scenario, as you are basically loaning the government your money without any interest attached. In order to remedy this problem, you can either increase the amount of federal income tax withheld from your pay or make estimated tax payments for your tax year. You may change the amount of federal income tax withheld from your pay by filing a new Form W-4, Employee’s Withholding Allowance Certificate.
A W-4 form is the familiar form your employer presents you with on your first day of work. It requires you to pick a specific number of “allowances.” That number is used to determine the percentage of your pay to be withheld from each paycheck. Ideally this amount is sufficient to cover your taxes for the entire year. In order to help with the accuracy of the withholding amount, the IRS provides a table on page 2 of the worksheet that covers the current tax brackets (taxes based on the amount earned) and lists the withholding amounts by exactly how you will be filing. For example, if you are married, filing jointly, and make $130,000 annually, you should withhold around $1,040 from each paycheck to cover your tax debt. If you cannot afford to withhold anything from your paycheck, but you are in a tax bracket that requires it, you will need to make quarterly estimated tax payments using a Form 1040-ES. If you do not make quarterly tax payments, you will be subject to interest at the end of the year on top of the amount you already owe.
If you are unsure of the amount of taxes you should pay annually to avoid a hefty tax bill at the end of the year, contact a tax specialist or attorney for a consultation.