What Is a Tax True-Up on Your Federal Tax Return?
Understand the reconciliation between your tax payments and total tax liability to gain more control over your tax refund or amount due.
A tax true-up is the process of reconciling the taxes you’ve paid throughout the year with your actual tax obligation, determined when you file your annual return. This reconciliation results in either a tax refund for overpayment or a tax bill for underpayment.
Understanding Tax Liability vs Tax Withholding
Your total tax liability is the full amount of tax you owe the federal government for the year. This figure is calculated based on your total income from all sources, minus any eligible deductions, and then further reduced by any tax credits you can claim.
In contrast, tax payments are the funds you have already sent to the IRS throughout the year to cover that liability. For most people with an employer, this happens through payroll withholding, where a portion of each paycheck is set aside for taxes based on information provided on a Form W-4. For those who are self-employed or have significant non-wage income, these payments are made as quarterly estimated tax payments.
A mismatch between your tax liability and your tax payments is common because your financial life can change. Significant life events often alter your tax situation. For example, getting married or divorced changes your filing status, which can affect your tax bracket. Having a child may make you eligible for new tax credits, while starting a side job introduces new income that likely has no taxes withheld initially.
Calculating the True-Up Amount
The final true-up calculation happens on your annual tax return, Form 1040. The result of this calculation is your tax refund or the amount you still owe.
Line 24 of the form shows your “total tax,” which is the tax liability calculated after accounting for all your income, deductions, and initial credits.
Next, you will find your total payments on Line 33. This line consolidates all the federal income tax you have already paid. It includes the federal income tax withheld from your paychecks, as shown on your Form W-2, any taxes withheld from other income sources reported on Form 1099, and any quarterly estimated tax payments you made during the year.
The true-up is the simple subtraction of your total payments (Line 33) from your total tax (Line 24). If the result is a negative number, it means you have overpaid, and you are due a refund for that amount. If the result is a positive number, you have an underpayment and will need to pay that balance to the IRS by the tax filing deadline to avoid potential penalties and interest.
Managing Your Tax Withholding
To avoid a large tax bill or an unnecessarily large refund in future years, you can adjust the amount of tax paid throughout the year. The primary tool for employees to manage this is the Form W-4, Employee’s Withholding Certificate. This form tells your employer how much to withhold from each paycheck, and you can submit a new one at any time to make changes.
A useful resource for determining the correct withholding amount is the IRS’s online Tax Withholding Estimator. This tool helps you project your annual income and tax liability based on your pay stubs and recent tax return. It will then provide specific recommendations for how to fill out your Form W-4 to get your withholding as close as possible to your actual tax liability, minimizing the final true-up amount.
For individuals with income not subject to payroll withholding, such as from self-employment or investments, making quarterly estimated tax payments is the standard method for managing tax obligations. These payments are calculated using Form 1040-ES, Estimated Tax for Individuals, and are due on the following dates:
- April 15
- June 15
- September 15
- January 15 of the following year
By accurately estimating your income and making these four payments, you can cover your tax liability as you earn the income, preventing a large balance due when you file.