Now that April 18 has passed, it's time to tackle one more tax-related chore: reviewing your W-4.
By Karen Bleier, AFP/Getty Images file
By Karen Bleier, AFP/Getty Images file
Your W-4 determines how much money your employer withholds from your paycheck to pay taxes, based on the number of allowances you claim. Most new employees fill out this form during orientation and then move on to more urgent matters, such as finding the bathroom. But if your personal situation has changed since you started your job, the number of allowances you chose when you filled out your W-4 may no longer be appropriate.
Consider adjusting your withholding if:
•You paid a big tax bill. The U.S. tax system operates on a "pay as you go" basis, which means you're supposed to pay taxes on your income throughout the year.
STORY: Tips for taxpayers in case the IRS calls
STORY: Which tax records should you save and which can you shred?
STORY: Deficit-reduction efforts threaten tax breaks
If you don't have enough tax withheld, you could face underpayment penalties, even if you square up with the IRS on Tax Day, says Bob Meighan, vice president at TurboTax.
•You got a big refund. Through April 8, the average refund was close to $3,000. Financial advisers often criticize Americans' penchant for big refunds, noting that taxpayers could invest that money instead of giving an interest-free loan to the government. Rock-bottom interest rates make that argument less compelling: The average one-year certificate of deposit is paying just 0.46%, according to Bankrate.com.
Still, giving the government a no-interest loan is a bad idea if you're carrying a credit card balance. If you reduce withholding and use the money to pay off debt, you'll earn a return of 18% or more.
Another problem with over-withholding is that you may have to wait to get your refund. This year, for example, the IRS didn't process tax returns from taxpayers who claimed itemized deductions until Feb. 14, which means those taxpayers had to wait until late February to get their refunds. A narrowly averted government shutdown also threatened to delay refunds for paper filers.
While the IRS gives taxpayers a projected date for delivery of their refunds, it's never guaranteed, Meighan says.
•You've experienced a big life change, such as marriage, divorce, retirement, or the birth of a child.
•You expect to earn income from a home business or other source that doesn't withhold taxes from your earnings. You can avoid underpayment penalties by paying estimated taxes every quarter on that income, but it's easier to increase your withholding, Meighan says.
To increase the amount of taxes withheld from your paycheck, you need to decrease the number of allowances you claim.
Alternatively, you can specify a dollar amount. For example, if you want your employer to withhold an additional $100 in taxes from each paycheck, write that number on Line 6 of your W-4.
•You converted an individual retirement account to a Roth IRA in 2010.
A law that took effect last year eliminated income restrictions on Roth individual retirement account conversions, allowing high-income taxpayers to shelter future IRA earnings from taxes. The law also allowed taxpayers who converted in 2010 to split income from the conversion between 2011 and 2012.
If you converted last year and opted to postpone the tax bill, increasing your withholding will reduce the amount you have to pay when you file your 2011 tax return, says Kathy Pickering, executive director of H&R Block's Tax Institute.
Figuring your allowances
One way to adjust your withholding is to guess: You can add or subtract an allowance, depending on whether you want to raise or lower your withholding, and hope for the best.
But with the help of technology, or a friendly tax preparer, you can be more precise. TurboTax and H&R Block tax software includes a program that allows customers to adjust their withholding, based on information from their 2010 tax return. If you paid a tax preparer to do your taxes, that individual can help you change your withholding, usually at no extra cost.
The IRS also offers a withholding calculator at irs.gov. To use the program, you'll need your most recent pay stub and your 2010 income tax return.
Sandra Block covers personal finance for USA TODAY. Her Your Money column appears Tuesdays. E-mail her at: sblock@usatoday.com. Follow on Twitter: www.twitter.com/sandyblock
Reasons to adjust your withholding
•Marriage
•Divorce
•Birth or adoption of a child
•Purchase of a home
•Retirement
Change in taxable income not subject to withholding
•Dividends, capital gains, interest
•Self-employment income
•IRA distributions
Change in itemized deductions or tax credits
•Medical expenses
•Gifts to charity
•Dependent care expenses
•Education credit
•Child tax credit
Contributing: Source: IRS
Posted | Updated
0 comments:
Post a Comment