Paying Too Much Or Too Little In Taxes? First Look At Your Withholdings
Are you an early filer or do you like to wait? I guess some of that depends on whether you are getting money back or you owe! When my clients owe money to the government and we have gone down every route there could possibly be to reduce their taxes, I remind them about their missed October tax planning appointment and we usually look at their withholdings.
An employer requires you to give them information on how much tax needs to be withheld from your paycheck. Based on the information that is provided to them, the employer then proceeds to withhold & submit income taxes on your behalf to the Internal Revenue Service. This information from you is obtained by means of the Form W-4.
The Personal Allowances Worksheet and the Dependents & Adjustments Worksheet help you calculate how much needs to be taken out in taxes. The way this worksheet is worded, you have to know your filing status, the number of dependents that are claimed on your return and if you plan to itemize on your tax return.
If this is your first job or if you are always confused about what to do with this form, be sure to talk to a tax professional. Also know that this is a legal document that you are signing and frivolous tax withholdings are penalized.
Once you have determined how much you need on your check to take care of your basic necessities, make sure you have factored in debt you are paying off or amounts you are contributing towards retirement. Depending on your age and other financial aspects of your life, these may need to take priority over getting that big refund check at tax time.
The W-4 mantra should be: The higher the number of deductions on your Form W-4, lesser is the amount of tax taken out.
Having too little tax taken out is also not a great idea. This will definitely give your bank balance every pay period a big smile but it will also lead to a huge tax bill at filing time and possibly interest & penalties on the shortfall in tax deducted at source.
Tax time is a really good time to take your latest pay-stub to your Enrolled Agent and have this discussion about what your withholdings are and whether you are covered. I am of the school of thought that as long as I have paid in enough to not hit interest & penalties when filing, I'd rather have the money & make smart investments than let the IRS keep it interest free.
But that is not true for everyone, some are averse to taking that risk, do not like to cut too close to the line or some may even think that this is a "forced way of saving money"! Whichever side of the fence you are on, be sure to talk to an Enrolled Agent.
Bibiliography: Form W-4
As always, read my disclaimer here. Please consult a qualified tax professional for your unique tax needs. More of my contact information is on my website, www.mntaxsolutionsllc.com.