It may be a good time to check — and possibly adjust — your withholdings to make sure you’re not having too little tax withheld, which may result in a tax bill and a possible penalty. There are actually a lot of potential tax scenarios that, if unchecked now, could result in you owing the IRS when you file your 2021 tax return in 2022.

This applies whether you are employed, self-employed or unemployed right now too.

We all have a lot to consider this year, and most people probably aren’t thinking about how to avoid a surprise tax bill next year or that they should be thinking about their tax situation. It is best to just take 10 minutes now to use the Tax Withholding Estimator and find out if you have enough being withheld this year.

The Tax Withholding Estimator is a tool on IRS.gov designed to help you determine how to have the right amount of tax withheld from your paychecks. When you use the tool, it will help you determine your potential tax and any amount owed. That way you will know if you need to:

• Adjust your tax withholding (taken from the money being paid to you) and submit a new Form W-4, Employee’s Withholding Certificate, to your employer,
  or
• Complete a new Form W-4P, Withholding Certificate for Pension or Annuity Payments, and submit it to your payer, or
• Make an additional payment or an estimated tax payments (quarterly payments made to the IRS) before the end of this year,
  or
• Both (a combination of the above methods).

Here are some other situations to consider that could lead to a surprise tax bill:

Unemployment Compensation in 2021

The American Rescue Plan Act of 2021 included a limited exclusion from income of up to $10,200 of unemployment compensation, but it was only applicable to what was received in 2020, not this year (2021). Thus, if you are receiving (or have received) unemployment compensation in 2021, that money is considered taxable income unless Congress enacts some type of relief. So, if you want to avoid having a tax bill next year, consider electing to have withholding taken out. Tax is generally not automatically withheld from unemployment compensation, and in most cases, you have to request that your state agency withhold tax.

Changes in income or circumstances that affect the Premium Tax Credit

While the Premium Tax Credit (PTC) makes health insurance more affordable by helping eligible individuals and their families pay premiums for coverage, your PTC may change if your income or family size changes during the year.

If you have changes in circumstances you must report immediately to the Marketplace, which include:

• Changes in household income (including lump sum distributions from social security, retirement accounts, etc.);
• Marriage or divorce;
• The birth or adoption of a child, or a change in dependent status of any other individual in your household ;
• You or another enrolled family member starting a job with employer-provided health insurance;
• You or another enrolled family member gaining or losing eligibility for non-Marketplace health care coverage;
• Other changes affecting income and your tax family, which includes you, your spouse if filing jointly, and your dependents;
• Changing your residence.

All of these changes can factor into the amount of credit for which you are eligible at the end of the year, especially if you are taking receiving advance payments of the PTC and they are not reported timely. To see how much these changes can affect your credit, try the Premium Tax Credit Change Estimator.

Receiving advanced Child Tax Credit payments

Some families who experience life changes could be issued more money as Advance Child Tax Credit payments than they’ll actually end up qualifying for when they complete their 2021 tax returns next year.

Some examples:

• • One or more of the children you claimed for the Child Tax Credit in 2020 will not be claimed on your tax return for 2021 (e.g., they turned 18 or changed residences and now reside more than half of the 2021 tax year with a different parent).
  • You have a divorce decree where each parent takes turns claiming one or more of the children every other year.
  • Your income increases and you’re no longer eligible for some or all of the child tax credit.

As a result of these types of ordinary family and life changes, you may receive a total amount of advance Child Tax Credit payments that exceeds the amount of Child Tax Credit that you properly are allowed on your 2021 tax return.

For more examples and the full eligibility rules, see Advance Child Tax Credit Payments in 2021 and the FAQS located there to determine if you may want to unenroll (opt out) of receiving these payments.

In short…

There were a lot of legislative changes over the last year, and there may be more to come, but for right now, you only have about six months left to make sure any tax that might be owed when you file your 2021 tax return in 2022 – is covered. So, at least consider trying the Tax Withholding Estimator, reviewing your financial situation, and if possible, act to make sure you’ve paid enough tax for 2021.

Additional resources

• About Publication 505, Tax Withholding and Estimated Tax
• The Premium Tax Credit – The Basics
• When to Use a W-4, Employee’s Withholding Certificate  (video)
• About Form W-4, Employee’s Withholding Certificate