taxes (Photo credit: 401(K) 2013)
Your withholding is the amount of money you have taken out of each paycheck to apply toward income taxes. When your taxes are filed at the end of the year, any amount that the Internal Revenue Service withheld is credited toward your tax bill. I, like many others, am unable to afford my own certified public accountant, and just hope that the amount withdrawn from my income will match up to the total taxes I owe. Usually that isn’t the case, but luckily, up until this point, I’ve only overpaid and earned a refund back from the IRS. Those who underpay end up getting a stiff bill, and may end up having to pay penalties as well.
According to the IRS, the average individual tax refund in 2012 was $2700. That calculates out to an average individual overpayment to the IRS of $225 per month. I have learned through a friend who uses a CPA from Burkett, that though some of us are accustomed to settling up during tax season, it is usually more beneficial for a taxpayer to calculate a withholding amount accurately in the beginning of the year. If you got a refund this tax season, you were, essentially, giving the government an interest-free loan. They wouldn’t do you a favor like that! This money may serve you better throughout the year paying down debt or accruing interest in a savings account. On the flipside, if you calculated your withholding amount improperly and you had to pay money out of pocket to the IRS during tax season, you may have suffered financially for it.
If you are having trouble determining how to make your withholding amount more accurate, or if you are receiving payment from anything other than a standard paycheck (such as distributions eligible to be rolled over into a qualified retirement or annuity plan) you may want to discuss your situation with a qualified CPA. Though it can be expensive, in some cases it can also be worth it. Certified public accountants with tax experience can make sure that you’re doing the right things to put yourself in the best position when tax season rolls around, whether that’s adjusting your withholding, or something else altogether. Sometimes being self-employed, owning your own business, or are dealing with corporate taxes can make things get a little bit muddy, and it can be helpful to address them with a qualified business CPA. I am a strong believer in the “better to be safe than sorry” approach.
Your withholding amount may have come reasonably close to the amount that you owed for the year, and if that’s the case, you probably don’t need to take any action now. However, there are a few major life events that can drastically affect the taxes you’ll owe for the year. If they occur, you will need to remember to file a new W-4 form with your employer to reflect them. Here are the top five events that may mean you need to fine-tune your withholding:
- When you get married or divorced. Married couples are usually eligible for a lower tax rate and certain deductions. A divorce can mean higher taxes for the earning spouse, and if you do not have enough withheld on your paycheck, you could face penalties and interest. This is one of those situations that can get a little hairy, so definitely consider a tax advisor or CPA if you’re struggling.
- When you have a child. Children can be claimed as dependents, and you may also be eligible for certain tax credits.
- When you can no longer claim a dependent. If one or more of your children is no longer eligible to be claimed as a dependent, you will lose an exemption and a tax credit.
- When your employment status changes. If you get a new job, a second job, become self-employed or become unemployed, the exemptions you want to claim may change. Depending on how drastic of a change you’re facing, it may be best to consult with a CPA.
- You purchase a home. If your mortgage interest and property-tax payments are higher, you may need to increase your allowances.
Whether you’re aiming to increase your withholding or reduce it, submitting a new W-4 to your employer will initiate a change that you should be able to see in your paycheck within a month. I submitted mine and saw the change on my very next paycheck! Of course, I am no professional, just a blogger sharing my experience, so if you do have any questions about how you should adjust your withholding amounts, definitely contact a trusted tax advisor or CPA.
David Tooley is a freelance blogger who writes for blogs such as Attorney’s Law Digest. He is sick of doing his own taxes, and hopes he can afford to pay someone else to do them next year!