presented by: Vision Financial
Failing to estimate your tax withholding properly may cost you in a variety of ways. If you receive an income tax refund, essentially you have provided the IRS with an interest-free loan; however, if you owe taxes when you file your return, you may have to scramble for cash at tax time. When determining the correct withholding amount, most taxpayers’ objective is to have just enough taxes withheld to prevent them owing the IRS when they file their return. You can accomplish this by understanding IRS Publication 505, properly completing Form W-4 (and accompanying worksheets) and providing an updated Form W-4 to your employer when your circumstances significantly change.
Form W-4 helps you determine the proper withholding amount. Two factors determine the amount of income tax that your employer withholds from your paycheck: the amount you earn and the information provided on Form W-4. This form asks you for three pieces of information:
- The number of withholding allowances you want to claim
- Whether you want taxes to be withheld at the single, married, or married with tax withheld at single rate:
- The additional amount (if any) you want withheld from your paycheck.
- When both spouses work and have taxes withheld at the married rate, they sometimes end up with insufficient taxes withheld. If this happens to you, remember that you can always choose to withhold at the single rate
Complete the Form W-4 worksheets to claim the correct number of allowances. Think of allowances as cash in your pocket at the time that you receive your paycheck. The more allowances you claim, the less taxes are taken from your paycheck (and the more cash ends up in your pocket on payday). The following factors determine your number of allowances:
- The number of jobs that you work
- The deductions, adjustments to income, and credits that you expect to take during the year
- Your filing status
- Whether your spouse works
To claim the correct number of allowances, complete Form W-4’s worksheets including a personal allowances worksheet, a deductions and adjustments worksheet, and a two-earner/two-job worksheet. IRS Publication 505 explains these worksheets.
Check your withholding. To avoid surprises at tax time, it’s a good idea to periodically check your withholding. However, in the following cases, accurate completion of the Form W-4 worksheets alone won’t guarantee that you’ll have the correct amount of tax withheld:
- When you’re married and both spouses work, or if either of you start or stop working
- When you or your spouse work more than one job
- When you have significant nonwage income, such as interest, dividends, alimony, or self-employment income,
- When you have a lifestyle change (e.g., marriage, divorce, birth or adoption of a child, new home, retirement) that affects the tax deductions or credits you may claim
- When tax law changes affect the amount of tax you’ll owe
In these cases, IRS Publication 505 can help you compare the total tax that you’ll withhold for the year with the tax that you expect to owe. This will help you determine any additional amount you may need to withhold to avoid writing a check on April 15 or help you identify if you’re having too much tax withheld.
–Mike Mungenast, Sr. Vice President, Senior Advisor
Vision Financial Group
4505 Pine Tree Circle, Birmingham, AL 35243
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