Why Now Is a Good Time to Review Your Withholding

Filing your 2025 federal income tax return can provide valuable insights to help with 2026 tax planning. For example, if you receive a large refund or owe significant taxes for 2025, you can benefit from revisiting your withholding for 2026.

Although a large refund can provide an enjoyable cash boost, it really means you were missing money in your pocket during the year and, essentially, giving the government an interest-free loan. At the opposite end of the spectrum, a large tax bill might come with interest and penalties. And paying a big amount all at once could put you in a cash crunch. To achieve a more desirable outcome for 2026, you may want to adjust your withholding and evaluate whether you should begin making estimated tax payments or, if you're already making them, adjust the amount.

Explore Your Circumstances

If all or most of your income is from wages, whether from a salary or hourly pay, your employer withholds amounts from your paychecks designed to cover your annual income tax liability. However, withholding amounts are estimates based on the 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 additional income from other sources, which could make standard withholding too low. Or you might have larger deductions or credits than is typical, which could make standard withholding too high.

One way to minimize overpayments or underpayments is to estimate your tax liability for the year and, 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, 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.  

You should repeat this exercise later in the year if you have major changes in your income or circumstances. (See "Life Changes Also Warrant a Withholding Review" below.)

Evaluate Estimated Taxes

Generally, you must make estimated tax payments if you expect to owe $1,000 or more in federal taxes when you file your return. This may be the case if you earn significant income from sources that aren't subject to withholding, such as:

• Self-employment,
• Pass-through income from partnerships, S corporations or limited liability companies,
• Interest, dividends, capital gains or other investment income, or
• Rentals or royalties.

To satisfy your estimated tax obligations, calculate your expected tax liability for the year, subtract any expected withholdings and credits, and pay the remainder in four equal installments. The 2026 estimated tax deadlines are April 15, 2026; June 15, 2026; September 15, 2026; and January 15, 2027.

However, you don't have to make estimated tax payments in a given year if you meet all three of these conditions:

1. In the prior tax year, your tax liability was zero, or you weren't required to file a return,
2. You were a U.S. citizen or resident alien for the entire year, and
3. Your prior tax year covered 12 months.

It's also possible to avoid having to pay estimated taxes by increasing your withholdings from wages or other income sources.

Beware of Penalties

The requirement to pay estimated taxes in four equal installments means you can be hit with penalties and interest if you skip or underpay an installment — even if your remaining installments cover your entire tax liability for the year. But it's not always easy to predict your tax liability, especially if your income fluctuates. Fortunately, there are ways to avoid penalties.

First, you won't owe penalties if you pay at least 90% of the current year's tax liability through withholding and equal estimated tax installments. However, there's still a risk that you'll underpay your taxes if your income is higher than expected.

For greater penalty-avoidance certainty, you can pay 100% of your prior year's tax liability through withholdings and equal estimated tax installments. Or pay 110% if your previous year's adjusted gross income was more than $150,000 ($75,000 for married couples filing separately). But you could end up overpaying current-year taxes, making a large interest-free loan to the government that you might prefer to avoid.

If your income fluctuates substantially during the year, there's a way to make unequal estimated tax payments and still avoid or reduce penalties: the annualized income installment method. It allows you to match each payment to your actual income, deductions and other tax attributes during that period.

Take Advantage of Withholding's Special Power

If you have withholding and owe estimated taxes on other income, you can avoid penalties for skipping 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 (or, if you're married, your spouse's) wages. Alternatively, increasing withholding from your IRA or other retirement plans may be possible if you're retired and don't have wages from which to withhold taxes. Consult your Porte Brown tax advisor for assistance.

Find the Happy Medium

Paying "just the right" amount of taxes during the year can be a challenge. You don't want to pay too little and incur interest and penalties. But you also don't want to substantially overpay and have too much of your money tied up during the year in an interest-free loan to the government. Your tax advisor can help you determine how to adjust your withholding, estimated tax payments or both to find the happy medium.