The object, in our humble opinion, it is best to “break even” when your taxes are filed getting only a small refund or owe a small amount.
If you have been getting a large refund each year, you have been giving your Uncle Sam an interest free loan. I have heard from many people this is a way for them to save, and not “blow” the money they would get each week in their paycheck. Yes, that is one way to look at it, but we believe that with a little discipline you could find ways to put that money to better use. In the Tax Tools section of our web site are calculators and estimators that can assist with getting your withholding right.
At the begging of each year and the end of each calendar quarter you should estimate and calculate income and tax due. In the Tax Tools section of this site are calculators that can assist with these estimates. From this estimate you can determine if the taxes withheld from your pay for the year are adequate and make adjustments by submitting a new W-4 form to your employer.
Adjusting your withholding requires a little planning and work on your part. Many factors affect how much you actually need to have taken from your paycheck such as -
- Your income for any given period
- Other income sources, such as unemployment or gains or losses from selling assets
- If you itemize deductions or use the standard deduction
If you work regularly, like every week of the year it is easier than if your work is sporadic and your not sure when or how long the next job will be. That scenario requires making estimates, or outright guess at what your income and deductions may be.
Changes in your life that can take place may well need an evaluation of your withholding, such as -
- Marriage or divorce
- Changes in employment - increases or decreases in income
- Buying or selling a house
- Birth of a child or changes in the number of dependents
- Large amounts of medical bills paid
Almost any life change has an impact on your tax liability and should be examined.
In the Tax Tools section of our site there are links to several tools that will help make some fairly accurate estimates.
First, use the tax estimator, and although it is for 2009, it will still be close to what your 2010 tax bill would be, and in fact will be slightly larger due to the fact that the personal exemption amount and standard deduction will be increased for inflation thus reducing your tax liability slightly. By using an estimated income it will tell you how much in tax you will owe.
Next, use the paycheck calculator link and enter the amount of income you estimated and the pay period as annual. Next is to choose a number of personal withholding exemptions. This is an important number in calculating how much tax will be withheld from your pay. You can change this number to see the effect it has on the tax withheld. Once you find a number that produces an amount of withholding close to the amount of tax due from the tax estimator, you now have the number of exemptions to claim on your W-4 form.
This paycheck tool will also calculate the withholding for any state that has a personal income tax.
Another method of determining how many exemptions to claim on your W-4 form, which determines how much will be taken out of your paycheck is to use the calculations included on the W-4 form. I know, you have looked at it before and thought "to hell with this", I'll just put down one or two and be done with it. If you follow the link on the Tax Tools page for the W-4 calculator it will walk you through the calculation and give you a number for the W-4. Be aware though, this is an IRS calculation and usually give you a smaller number of withholding exemptions than what you actually need or want. After all, they prefer to hold and use your money before giving it back to you.
In this calculation there is a place where you put in the number of dependents you have. When calculating for how much to have withheld from your pay this can be any number you choose. On the W-4 you are not bound to putting in the actual number of dependents you will claim on your tax return. By law you are entitled to having the correct amount of .tax withheld from your pay. Be aware though, that when your return is prepared and you owe more than $1,000 a penalty for under withholding during the year may be imposed.
The link mentioned above will not only calculate the federal W-4 it can print federal and state withholding forms for you, and is free
We believe it is important for you to check your withholding at least every calendar quarter to make sure you are not being under withheld which could lead to problems later.
If we can be of assistance or answer any questions you may have do not hesitate to contact us.
