This could help you avoid headaches later.
The important points
- Earning more money could change your tax situation and lead to a higher IRS charge.
- It’s a good idea to have some cash on hand in case your tax bill ends up being higher than expected.
Inflation rose sharply in 2022, leaving many consumers struggling to make ends meet. Fortunately, employers are doing all they can to help workers cope with inflation. According to data from Willis Towers Watson, salary increases in the United States are expected to reach 4.6% in 2023. And although this rate is lower than the most recent inflation rate, it is still an increase. fairly decent salary.
But what if you get a raise of more than 4.6% this year? Maybe you got a promotion after years of hard work. Or maybe you just got a graduate degree that got you a big raise.
In any case, a higher salary is a good thing. This could mean pumping more money into your IRA account and investing more in a brokerage account. It could also mean avoiding credit card debt for the first time in years.
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But a huge pay rise could also affect your tax situation. And this is an important thing to prepare.
Your taxes could go up
The more money you earn, the more taxes you are likely to pay. It’s quite easy. But what you might not know is that by making a lot more money, you can end up in a higher tax bracket, where you pay a higher rate of tax on your earnings. the highest. If that happens and you don’t adjust the amount of tax you withheld from your paychecks, you could owe the IRS money next year — or more than usual.
So if you get a raise, it’s a good idea to set aside some of that extra money for tax purposes. That way, if you have to write a check to the IRS in 2024, it won’t be a source of panic and stress. Instead, you can just dive into your savings account and find the money.
It is not only a salary increase that can lead to an increase in the tax burden
Earning more money at your job could easily lead to a scenario where your tax burden increases. But it can also happen for other reasons.
This year, for example, savings accounts pay more interest. So if you earn a lot of interest, it could potentially push you into a higher tax bracket or cause you to owe money to the IRS next year. The same could easily be true if you sell many assets in your brokerage account for a profit.
For this reason, it’s always a good idea to set aside extra money for tax billing purposes, even if you usually end up getting a refund. The IRS will work with you if you are unable to pay a tax bill in full, but interest and late penalties apply in this scenario. A better bet is to put yourself in a position to pay your tax bill in full when it’s due.
Our advice for the best tax software
Our independent analysts have studied the benefits and user ratings of the most popular tax services to find the best tips for your tax return. Start by checking out our list of the best tax software.
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