Payroll Withholding Adjustments

BASED ON INCOME TAX PROJECTIONS

If you usually receive large income tax refunds or if you have some changes in your life since the last tax year, you should consider claiming additional withholding on your W-4 through your employers payroll department.

By increasing the number of withholding allowances you claim, you reduce the amount taken out of your regular paycheck for federal and state tax purposes. You may want to claim additional withholding allowances for the following:

• Increased charitable deductions
• A new member of the family
• A new or increased home mortgage
• A change in taxable income
• Increased contribution to employee benefit plans
• Other increases in your itemized deductions
• Business or other capital losses

The purpose of fine tuning your W-4 is simply to avoid receiving a large income tax refund. Instead, you can receive the refund through each paycheck and invest it sooner thereby earning interest and capital gains on those dollars.

OVERPAYMENTS OF TAXES DOES NOT EARN INTEREST WHILE IT SITS WITH THE IRS

By investing this money as soon as possible rather than every tax season, you can compound it into a large nest egg over time. Our experience shows most people spend - not save - their tax refund anyway. A better way is to set up a systematic or electronic savings program out of your checkbook that still “forces” you to actually save the money.

COMPLETING AN INCOME TAX PROJECTION

The best way to accurately set your tax withholding for each paycheck is to do an income tax projection for the year. This means filling out your income tax forms and totaling up how much you would owe in taxes by the end of the year. You will need to do your state tax forms first because state taxes are a deductible item on your federal forms.

Once you have calculated the total taxes that will be due, simply divide it by the number of paychecks you receive in a year. This number represents what you should have withheld per paycheck. Compare it to what is currently being withheld and adjust accordingly. If you are having too much withheld, increase your allowances until the allowances produces a withholding dollar amount equal or slightly above your projected goal.

You may elect to use the worksheet furnished by the IRS on the back of, or attached to the W-4 form. This same W-4 is required by your employer in order to determine your withholding amounts.

Some payroll systems even allow you to withhold a set dollar amount that is preferable because you can most accurately match your dollar amount this way. Remember to do this for state and federal taxes and the goal is to only produce a small tax refund every year not owe money which may produce tax penalties.

If you are doing this calculation for the current tax year you are in, you need to subtract from your total tax liability the amount you have already paid in, year to date. This year to date figure is often readily available from your last check stub in the year to date box.

Source: Financial Planning Consultants, Inc.



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