A column on personal finance prepared by the Virginia Society of Certified Public Accountants
ARE YOU HAVING TOO MUCH TAX WITHHELD?
(March 19, 2003) - How many times have you celebrated when you discovered you were getting a large tax refund? Although you may feel like you’ve received a “gift” from the IRS, the reality is a bit more sobering. The IRS has been the recipient of your generosity. Your tax refund check is nothing more than a return of your own money – money you could have used to invest, pay down debt, or cover expenses. Instead you gave it to the IRS in the form of an interest-free loan. According to the Virginia Society of CPAs, it’s best to accurately calculate the amount of tax you have withheld so that it works for you, and not for the government.
How Withholding Works
When you take a new job, you must complete what is known as Form W-4, Employee’s Withholding Allowance Certificate. This form asks you to indicate your filing status and the number of federal exemptions you choose to take. You can claim one allowance for yourself and for each dependent. If you’re married, you also can claim an exemption for your spouse if he or she does not claim one on a W-4 of his or her own.
Based on the information you submit on your W-4, your employer calculates the amount of federal tax to withhold from each paycheck and forwards the money to the government. Basically, this pay-as-you-earn taxation system ensures that your taxes are distributed evenly throughout the year and that the government receives money to fund federal programs on an ongoing basis.
Factors That Affect Withholding
Although you cannot avoid withholding, you can control the amount withheld. What’s more, you have the opportunity to adjust your withholding depending on your family situation. But remember – it’s up to you to provide your employer with a new W-4 as your tax circumstances change.
For example, if you make a large monthly mortgage interest payment, or pay alimony, you may reduce your final tax bill so that you receive a large refund. To compensate, you can claim more allowances on your W-4 to reduce the amount deducted from your paycheck.
In addition, if you get married, add to your family, or take on a mortgage, and don’t adjust your withholding, you may be overpaying your taxes. This is also true if your spouse starts or stops working or if you qualify for the dependent care, child tax, or the higher education credits. Taxpayers who received a large refund for 2002, and whose income, adjustments, deductions, and credits will remain the same in 2003, may need to adjust their withholding. This also applies to those whose income remains the same but who expect to have more deductions or credits than they did last year.
Adjusting Your Withholding
IRS Publication 919, How Do I Adjust My Tax Withholding, includes instructions and a number of worksheets that can help you calculate the proper amount of tax to have withheld. You should begin by completing Worksheets 1 and 2, which project your tax and withholding for the year. Additional worksheets are included for taxpayers who itemize deductions, claim certain credits and adjustments to income, have two jobs or whose spouses are also employed.
Once you have completed Form W-4, you can compare the number of allowances to the number you are already claiming. If the number is different, you should submit a new Form W-4 to your employer(s).
Your employer must put your new Form W-4 into effect no later than the start of the first payroll period ending on or after 30 days following the date you gave your employer your revised form. If the change applies to next year, your new W-4 will take effect at that time.
A CPA Can Help
For some taxpayers, choosing the optimal amount for federal tax withholding can be a challenge. A CPA can help you adjust your withholding so that it more closely matches your projected tax liability for the year. This will enable you to put the additional money in your paycheck to better use.
The Virginia Society of CPAs is the leading professional association dedicated to enhancing the success of all CPAs and their profession by communicating information and vision, promoting professionalism, and advocating members’ interests. Founded in 1909, the Society has nearly 8,000 members who work in public accounting, industry, government and education. This Money Management column and other financial news articles can be found in the Press Room on the VSCPA Web site at www.vscpa.com.
Lifetime Financial Planning, LLC
2325 Dulles Corner Boulevard, Suite 500, Herndon, Virginia, 20171
208 South King Street, Suite 201, Leesburg, Virginia, firstname.lastname@example.org
Hourly Fee Only
| Financial Planning | Investment
Advice | College Savings Plans
©2001-2003 Lifetime Financial Planning, LLC All Rights Reserved