Tips on Managing Your Tax Withholdings
By Tom Breedlove of Breedlove & Associates
In the coming weeks, taxpayers across the country will prepare their 2011 income tax returns (the deadline is April 17th this year). As the numbers get crunched, many filers will be holding breaths and crossing fingers – hoping they don’t owe much money or, even better, get a refund.
For those who end up owing a lot of money to the government, some get frustrated with their employer – assuming they didn’t withhold taxes correctly.
Although that happens sometimes, the more common explanation is simply that the tax withholding process is very imprecise. Form W-4 is the IRS worksheet used to roughly estimate tax liability through an employee selection of “marital status” and “allowances.” The selections determine the amount of taxes your employer withholds from your paycheck each payperiod. But it is a very rough estimate. And if your tax withholdings are a little too high or a little too low each week, it can add up – over the course of an entire year – to a larger-than-expected payment or refund.
We’re all okay with a surprisingly-large refund, but a surprisingly-large payment is not fun. If you don’t want to owe money at the end of the year, the answer is to decrease your allowances on Form W-4. For instance, if you’re currently at Single with 2 allowances, consider changing it to 1 allowance or maybe even 0 allowances. (Each allowance will reduce your weekly take-home pay by about $10 depending on your income level and state, thereby reducing your year-end federal income tax liability by about $500). Note: On the W-4 Line 6, you can pick an additional amount, say $5, to withhold each paycheck. This enables taxpayers to more precisely manage their withholdings.
Conversely, if you have a very large refund and want to have access to more of that money during the year, you should increase your allowances on Form W-4. Again, each allowance you add will put an extra $10 or so in your pocket each week. (Keep in mind that your refund at the end of the year will be reduced by about $500).
If you’d like to play with scenarios, feel free to use our Nanny Tax Calculator. If you decide to change your allowances, here’s a Form W-4 for your convenience. Just fill it out, sign it and give it to your employer. They should be able to make the adjustment on your next paycheck. If you or your employer have any questions, feel free to call us at 1-888-273-3356.