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ADJUSTING YOUR WITHHOLDING

WHEN YOU SHOULD ADJUST YOUR WITHHOLDING

If the IRS usually owes you a substantial amount when you file your income tax return, or you typically owe the IRS a substantial amount at that time, you should consider adjusting your withholding arrangement with your employer. Your employer withholds income tax from your paycheck based on the number of exemptions and allowances you claim on Form W-4. You are asked to give the employer this form when you are first hired. Problems arise, however, because it's up to you to give the employer new W-4s as your tax circumstances change over the years; many employees forget to take this step.

For example, if you have children or take out a mortgage but fail to adjust your withholding downward to reflect the tax benefits these events generate, you may be overpaying your tax during the year. Other events that may indicate a need to file a new Form W-4 include marriage or divorce, loss of a dependent, or major changes to: non-wage income (interest, dividends, capital gains), family wage income, itemized deductions or tax credits.

Refunds: An Interest-Free Loan to the Government

If you have too much withheld during the year, of course, you will receive a refund after filing your return. While everyone enjoys getting a refund, it actually means you have made an interest-free loan to the government. You could have used the money during the year to generate income or for personal purposes. You should adjust your employer's withholding downwards to increase your regular take home pay.

Is Too Little Being Withheld?

At the other extreme are taxpayers who have too little withheld and who owe substantial amounts come April 15th. While they enjoy the "extra" amounts received in each paycheck, the costs incurred for this enjoyment can far outweigh its benefits. Not only will you be paying back the amounts owed in taxes in April, but also you will likely be tacking on extra in the form of penalties. If the above describes your situation, you should adjust your employer's withholding upwards. (As a rough guideline, you should owe less than 5% of your tax bill come April.)

Unfortunately, the procedures for arriving at the proper withholding amounts are among the most complex that taxpayers confront. A wide array of factors play a role including exemptions, deductions, marital status, your spouse's income, etc. If your situation calls for a withholding adjustment (up or down), and you would like some guidance in getting through this maze, please give us a call or email us. We deal with this issue on a regular basis and can help you with any adjustments needed.

Important note: This is a summary and, as such, it is not intended as a complete explanation of all applicable situations. Many exceptions, definitions, and special rules in the law have been paraphrased, simplified and/or omitted. Readers should not take specific action in reliance on this summary without consulting the statute and regulations or seeking advice from a qualified professional.

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Overview Business Financial Planning Individual How to Protect Yourself from Identity Theft Adjusting Your Withholding Taxpayers Beware – The Strike of the AMT Moving Expenses Tax Audit Triggers Birthdays More or Less Taxing QuickBooks Other		ADJUSTING YOUR WITHHOLDING WHEN YOU SHOULD ADJUST YOUR WITHHOLDING If the IRS usually owes you a substantial amount when you file your income tax return, or you typically owe the IRS a substantial amount at that time, you should consider adjusting your withholding arrangement with your employer. Your employer withholds income tax from your paycheck based on the number of exemptions and allowances you claim on Form W-4. You are asked to give the employer this form when you are first hired. Problems arise, however, because it's up to you to give the employer new W-4s as your tax circumstances change over the years; many employees forget to take this step. For example, if you have children or take out a mortgage but fail to adjust your withholding downward to reflect the tax benefits these events generate, you may be overpaying your tax during the year. Other events that may indicate a need to file a new Form W-4 include marriage or divorce, loss of a dependent, or major changes to: non-wage income (interest, dividends, capital gains), family wage income, itemized deductions or tax credits. Refunds: An Interest-Free Loan to the Government If you have too much withheld during the year, of course, you will receive a refund after filing your return. While everyone enjoys getting a refund, it actually means you have made an interest-free loan to the government. You could have used the money during the year to generate income or for personal purposes. You should adjust your employer's withholding downwards to increase your regular take home pay. Is Too Little Being Withheld? At the other extreme are taxpayers who have too little withheld and who owe substantial amounts come April 15th. While they enjoy the "extra" amounts received in each paycheck, the costs incurred for this enjoyment can far outweigh its benefits. Not only will you be paying back the amounts owed in taxes in April, but also you will likely be tacking on extra in the form of penalties. If the above describes your situation, you should adjust your employer's withholding upwards. (As a rough guideline, you should owe less than 5% of your tax bill come April.) Unfortunately, the procedures for arriving at the proper withholding amounts are among the most complex that taxpayers confront. A wide array of factors play a role including exemptions, deductions, marital status, your spouse's income, etc. If your situation calls for a withholding adjustment (up or down), and you would like some guidance in getting through this maze, please give us a call or email us. We deal with this issue on a regular basis and can help you with any adjustments needed. Important note: This is a summary and, as such, it is not intended as a complete explanation of all applicable situations. Many exceptions, definitions, and special rules in the law have been paraphrased, simplified and/or omitted. Readers should not take specific action in reliance on this summary without consulting the statute and regulations or seeking advice from a qualified professional.