Tax season would be easier if we could set it and forget it—if our tax liability was consistent year over year and our withholding perfectly balanced to minimize surprises when it’s time to file returns.
However, there are a number of situations, such as a change in employment (losing your job, changing jobs, or getting a raise) or a change in lifestyle (getting married or divorced or having a child), that could move you up or down a tax bracket, which can change what you owe the IRS.
We’ve got a guide to 2024 tax brackets to help you get a sense of where you fall—but keep in mind that these are marginal tax rates, so it’s a bit more complicated than multiplying a single percentage by your entire income. It can also be trickier to figure out your tax liability when you’re an independent contractor, gig worker or are self-employed and have to make estimated payments on fluctuating income throughout the year.
If you anticipate a major life event (or are surprised by one) this year that could move you up or down the tax bracket hierarchy, here’s how to prepare.
Don’t wait until tax season
First things first: Don’t wait until the end of the tax year in December to assess your tax situation. You certainly shouldn’t put it off until March or April when returns are coming due. Taxes are a year-round project, not an annual one—even if you don’t have to make estimated tax payments on a quarterly basis (on self-employment income, for example), you should consider your tax liability regularly as part of your overall financial health.
If you anticipate or experience a change in your income or your filing status, look at how this will impact your taxes for the year as quickly as you can. By the time filing deadlines roll around, there’s very little you can do to avoid surprises.
Pull out last year’s return
Henry Grzes, lead manager for tax practice & ethics with the American Institute of CPAs, recommends starting with your prior year’s return. “For the most part, income and deductions don’t change a lot year to year as a general rule,” Grzes says, unless you earn 1099 income from self-employment or gig work or have capital gains.
You can use last year’s return to do a rough projection using a tax calculator (there are free tools from TurboTax, H&R Block, and the IRS) and your updated information, such as changing from a single filer to married filing jointly or a higher or lower gross income.
Research possible strategies
The tax system is complicated, which is why it’s often helpful to hire a professional who can help you throughout the year (more on that below). But it’s also on you to do your due diligence on credits, deductions, and withholding to better anticipate your liability.
For example, if you know you’re having a child this year, you may be eligible for the child tax credit or the child and dependent care credit.
If you’re a W-2 employee, you may also need to adjust your withholding on your Form W-4, where you can change your filing status and add dependents and other income. Grzes says changing your withholding depends on your philosophy and whether you prefer a big refund in the spring or have the discipline to save in case you owe a balance on your return.
Note that self-employed individuals and independent contractors will likely need to set aside more for quarterly payments if they anticipate an income bump and a tax rate increase.
Ask a professional
Even if your taxes are relatively simple—you only have W-2 income and take the standard deduction, for example—you may still benefit from working with a tax professional who can help ensure you’re reducing the impact of any tax bracket change, such as credits and deductions you’re newly eligible to claim or putting part of an income increase toward retirement contributions or a flexible spending account.
Find a tax preparer who knows their stuff—ideally one who is available to consult with year-round.
