Many taxpayers discover at filing time that their tax payments during the year didn’t match their actual tax liability. Sometimes too much tax was withheld from paychecks, while in other cases not enough was paid throughout the year.
A small difference is normal, but significant overwithholding or underwithholding can create financial challenges. Overwithholding reduces the amount of money available to you during the year, while underwithholding can lead to a large balance due, along with possible interest and penalties.
If you received a sizable refund or owed a substantial amount when filing your 2025 tax return, now is a good time to review your withholding and make adjustments for 2026.
Review Your Income and Current Withholding
For taxpayers whose primary income comes from wages or salaries, employers withhold taxes from each paycheck based on IRS withholding tables. These tables are designed to estimate a typical employee’s annual tax liability.
However, your financial situation may differ from the average taxpayer at your income level. For example:
- You may qualify for larger deductions or tax credits,
- You may earn additional income from investments or side work,
- Or your household situation may have changed.
These factors can make your current withholding either too high or too low.
Adjust Your Withholding if Necessary
One of the best ways to avoid overpaying or underpaying taxes is to estimate your expected tax liability for the year and adjust your withholding accordingly.
You can do this by submitting an updated Form W-4, Employee’s Withholding Certificate, to your employer.
The IRS Tax Withholding Estimator can also help calculate a more accurate withholding amount. The estimator now reflects several important provisions included in the One Big Beautiful Bill Act (OBBBA), including:
- Elimination of taxes on qualified tips and overtime pay (within applicable limits),
- New deductions for seniors,
- Auto loan interest deductions,
- Updated tax benefits related to families, charitable giving, and homeownership.
Keep in mind that after submitting a new Form W-4, it may take several weeks for the changes to appear in your paycheck.
Revisit Your Withholding After Major Life Changes
Life events can significantly affect your tax situation during the year. It’s important to review your withholding whenever major changes occur.
You may need to update your Form W-4 if you:
- Experience a significant increase or decrease in income,
- Get married or divorced,
- Have a child or add a dependent,
- Purchase a home,
- Begin receiving additional income that isn’t subject to withholding.
Even if you’ve already updated your withholding recently, another review after a major life event can help ensure your tax payments remain accurate.
Use Withholding Strategically
If part of your income is not subject to withholding, estimated tax payments may also be necessary.
However, increasing withholding can sometimes help avoid estimated tax penalties. Unlike estimated tax payments, withholding is generally treated as though it was paid evenly throughout the year, regardless of when it was actually withheld.
This strategy may allow you to:
- Increase withholding from your wages,
- Increase withholding from a spouse’s paycheck,
- Or increase withholding from IRA or retirement plan distributions if you’re retired.
Using withholding strategically may help reduce penalties and simplify tax payments.
Find the Right Balance
Keeping your withholding aligned with your expected tax liability can improve cash flow throughout the year and help you avoid surprises at tax time.
A professional review of your withholding and estimated tax payments can help determine whether adjustments are needed for 2026 and ensure you remain on track financially.
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