More taxpayers saw a larger 2025 tax liability than they may have had in recent past years. Federal income tax withheld from your salary or wage has a direct correlation to your tax refund or liability on your annual tax return.
If you are overwithheld, that is akin to giving the IRS an interest-free loan, leaving you with less of money that is yours. If you are underwithheld, that large deficit often leads to an unwelcome tax bill come April 15th.
If you were surprised by your balance due or refund at tax filing time this year, now is a good time to review your payroll exemptions and tax withholdings. By reviewing your income, deductions, credits, and any recent life changes, you can better align your paycheck withholding with your expected 2026 tax liability and improve your cash flow throughout the year.
Review your income and withholding
If all or most of your income is from wages, whether from a salary or hourly pay, your employer withholds amounts from your paychecks intended to cover your annual income tax liability. However, these withholding amounts are estimates based on IRS withholding tables, which approximate a typical worker’s annual tax liability at your compensation level.
Your situation may differ from that of a comparably compensated worker for various reasons. You might have larger deductions or credits than is typical, which could make standard withholding too high. Or you might have additional income from other sources, which could make standard withholding too low.
Adjust your withholding if needed
One way to minimize overpayments or underpayments is to estimate your tax liability for the year. Then, if necessary, adjust your withholding by completing a new Form W-4, “Employee’s Withholding Certificate.”
The IRS’s Tax Withholding Estimator can help. It now reflects key provisions of the One Big Beautiful Bill Act (OBBBA), including the elimination of taxes on qualified tips and qualified overtime (up to applicable limits), as well as new deductions for seniors and auto loan interest. It also more accurately accounts for OBBBA changes to tax breaks related to families, homeownership and charitable giving.
Once you submit a new Form W-4 to your employer, changes typically will take a few weeks to go into effect. Keep that in mind when you determine your adjustments.
Revisit withholding after life changes
Changes during the year can affect the accuracy of your withholding. Review your Form W-4 and consider making adjustments if you:
- Experience a significant increase or decrease in income,
- Get married or divorced,
- Have a child or add a dependent,
- Buy a home, or
- Receive new sources of income not subject to withholding.
Even if you’ve already adjusted your withholding, reviewing it again after a major life event can help you stay on track.
Use withholding strategically
If part of your income isn’t subject to withholding, estimated tax payments may also come into play. You can avoid penalties for missing or underpaying an estimated payment by increasing your withholding to make up the difference. Unlike estimated tax payments, withholding amounts are treated as paid evenly throughout the year — regardless of when they’re actually withheld.
Using this strategy, you can increase withholding from your wages (or from your spouse’s, if you’re married). Alternatively, if you’re retired and don’t have wages from which to withhold taxes, increasing withholding from your IRA or other retirement plan distributions may be possible.
Find the right balance
Keeping your withholding aligned with your expected tax liability can help you enjoy better cash flow during the year and avoid surprises at filing time. Contact your Rudler, PSC advisor and we can review your current withholding (and estimated tax payments, if applicable), project your tax liability for the year and assist with deciding whether to make any withholding changes for 2026.
RUDLER, PSC CPAs and Business Advisors
This week's Rudler Review is presented by Jenna Polston, Tax Department Administrative Assistant and Kaitlyn Evans, CPA.
If you would like to discuss your particular situation, contact Jenna or Kaitlyn at 859-331-1717.
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