Tax withholding tips
It's that time of year again. Young men's fancies turn to thoughts of love, April showers bring May flowers and Americans divide themselves into two groups: those who are expecting tax refunds and have already filed their returns, and those who fear a tax bill and are putting off filing to the very last moment.
Regardless of the group that claims your membership, now is a good time to take a look at the withholding instructions you gave your employer to see if the amount is still the best fit for your current situation.
If you receive a large refund, you may want to consider having less withheld so you have more cash on hand to meet daily expenses. If you owe a significant amount, it may be best to have more withheld so you can avoid a crisis next April.
Taxpayers can change the withholding amount on their paychecks by submitting a W-4 Form to their employer. Increasing the number of allowances on the form will decrease the refund, but you'll have a bigger paycheck each month.
Reducing the number of allowances increases the amount withheld, and you'll owe less at tax time. Form W-4 includes a worksheet that can help pinpoint the appropriate number of allowances to submit.
There are several situations where not adjusting withholding rates can cause problems. Consider these:
* One situation pertains to young people claimed as dependents by their parents. Many young adults who have summer or after-school jobs have found they owe additional taxes rather than getting the small refund they expected.
The general reason for this is the Making Work Pay Credit that was put in place in 2009 and continues through 2010. The idea behind the program was to stimulate the economy by putting a few more dollars into workers' paychecks each month.
As part of this credit, less tax was withheld from all taxpayers, even though the actual tax rate remained the same. At tax time, most workers receive a $400 credit to make up for the reduced withholding. Unfortunately, if you can be claimed as a dependent by someone else, you are not eligible for the credit. If your kids have after school or summer jobs, have them review their withholding status. Otherwise, they may be coming to you for help with $200 or $300 to pay Uncle Sam.
* Another circumstance that catches taxpayers by surprise is when they fail to adjust withholdings when family circumstances change. Consider this case:
Mary, a single mom, has been filing as "head of household with one dependent" and had taxes withheld accordingly. Last year, her daughter moved out on her own; however, Mary did not adjust her withholding.
At tax time, she was taxed at the higher single rate (compared to the head of household rate) and could no longer use her daughter's exemption. The result was $1,500 tax due for 2009 instead of the $400 refund she received last year.
Adding to her dismay was the fact that she is still in the same predicament for 2010. The Internal Revenue Service provides a resource for this kind of need.
Its Web site, http://www.irs.gov features a link to a withholding calculator.
Using it requires entering information from the most recent paystubs and projections for expected income, credits and adjustments. Mary used the site and received some very specific recommendations.
Her current withholding rate was projected at $1,050. Her tax due was projected at $2,450, meaning a projected bill of $1,400 next April. The recommendation was to change her W-4 to "single with one allowance." If this change is made in time for the next pay period, the projection is for a $50 refund instead of the $1,400 shortfall.
The calculator did not suggest what the new withholding amount should be, but quick math indicated that Mary would need to have $105 withheld each paycheck for the rest of the year instead of the $42 that had previously been withheld.
Though a tough adjustment to make, it may be easier than finding an extra $1,500 to pay in taxes come April.
Spend a few minutes reviewing your income tax withholding rates. It will be time well spent to help ensure that next tax season won't bring unwanted financial surprises.
Miner is a member of the Utah State University Extension Financial Education Committee