Tax Tips
Should I adjust my income tax withholding? - June 2003
Richard Scrivanich - Partner
With the passing of April 15, most of you either have received your refund or, if you were unfortunate, have had to help subsidize the government a little more that you would have preferred.
Either way, if the amounts involved were substantial, you should consider submitting a new Form W-4, Employee's Withholding Allowance Certificate, to your employer. Your employer withholds income tax from your paycheck based on the number of withholding allowances you claim on Form W-4. You have to give this form to your employer when you first begin work. Problems arise, however, because it's up to you to give the employer new W-4s as your tax circumstances change over the years and many employees don't take this step. For example, if you have children or take out a mortgage but fail to adjust your withholding downward to reflect the tax benefits these events generate, you may be overpaying your tax during the year. Similarly, if you are entitled to the dependent care credit, child tax credit, and/or the higher education credit, you should submit a new Form W-4 to have your withholding reduced accordingly. On the other hand, if you have finally paid off the mortgage on the house, or the kids have now gone on their own, you have to increase your withholding.
If you have too much withheld during the year, of course, you will receive a refund after filing your return. While everyone enjoys getting a refund, in fact, it means you have made an interest-free loan to the government. You could have used the money during the year to generate income or for personal purposes. You should adjust the amount your employer withholds downward to increase your regular take home pay.
At the other extreme are taxpayers who have too little withheld and who owe substantial amounts come April 15th. While they enjoy the "extra" amounts received in each paycheck, the costs incurred for this enjoyment can far outweigh its benefits. Not only will you be paying back the amounts owed in taxes in April, but you will likely be tacking on extra in the form of penalties. If this describes your situation, you should adjust your employer's withholding upwards. (As a rough guideline, you should be owing less than 10% of your tax bill come April.)
Unfortunately, the procedures for arriving at the proper withholding amounts are among the more complex ones taxpayers confront. A wide array of factors play a role: exemptions, deductions, credits, marital status, your spouse's income, and others. The Form W-4 includes three worksheets that you may have to complete to determine the proper withholding. If you think your situation calls for a withholding adjustment (up or down), and you would like some guidance in getting through this maze, please give me a call at (562) 698-9891.
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