Only about 1 in 4 American taxpayers has updated their withholding since the IRS released the new W-4 in December 2019, resulting in 45% of Americans not knowing how much tax is withheld from their pay, according to a new study by the American Institute of CPAs. The study, which polled 2,028 adults online from October 1 to October 5, found that 37% of American taxpayers admit they aren’t even familiar with the W-4, including 11% who say they’ve never heard of it.
Reduce What You Owe: What Can I Write Off on My Taxes?
“There have been a number of changes to withholdings over the past three years and we’ve found that many Americans haven’t been making adjustments accordingly. Inaccurate withholding can lead to an unpleasant surprise come Tax Day,” Gregory J. Anton, CPA, CGMA, chairman of the AICPA’s National CPA Financial Literacy Commission, said in a statement. “And with many individuals in a financially precarious position, it’s more important than ever to understand how withholding impacts your cash flow and overall financial situation.”
Big Changes: What Does Biden’s Win Mean for Your Taxes Next Year?
The study also notes that in the past three years, 19% of tax-filing Americans claim to have received an unusually large tax bill, and of these, 39% were extremely surprised.
However, it is possible to take action now and avoid surprises come Tax Day 2021: The IRS has a free Tax Withholding Estimator, which enables Americans to get a general idea of whether to expect a refund or plan for a bill. Complicating the matter this year, there are many new factors to take into consideration, including the increased number of people who filed for unemployment – which the federal government taxes as ordinary income – for the first time due to the pandemic.
“Tax Day doesn’t have to be a surprise. With better planning, a tax bill can be predictable,” Kim Hardy, CPA, member of the AICPA’s National CPA Financial Literacy Commission, said in a statement. “If you haven’t done so already, the end of the year is a great opportunity to review your current withholding and start 2021 off right. If you know ahead of time that you will owe when you file, you put a plan in place and budget accordingly.“
More From GOBankingRates