You should review your total employer paystub “W-4” withholdings from the prior year every January. Most people pay the bulk of their annual Federal Income tax bill via payroll withholding.
Through this process, a percentage of your pay is taken out each pay period and sent to Uncle Sam. Consider that you are required to pay either 90% of this year’s tax liability or 100% (or 110%) of last year’s tax liability depending on whether you earned under or over $150K. Many circumstances can affect the amount of tax you’ll eventually owe including marriage, divorce, having a baby, a job change or loss which can affect your taxable income for the year.
Make sure that you are not overpaying thousands of dollars in Federal Taxes each year to Uncle Sam – just to get a big fat check back after April 15th. People that look forward to getting their refund check in the spring fail to consider that the money is not earning interest throughout the year. In other words, you are providing your favorite Uncle an interest-free loan.
Your monthly tax over-payment could be better redeployed paying down current high-interest credit card debt or utilized for building up needed cash reserves. If you have a short-term emergency or unemployment, you can’t call up the Fed and ask for your money back. If you do get a large tax-refund back in April, do not blow it all on a vacation or gift as if it was ‘found money.”
On the flip-side, also make sure that you did not greatly underpay your Federal Tax obligation. Even if you get a Federal Tax extension, you are still required under law to pay the IRS your “owed” back taxes each year by April 15th. Failure to pay back-taxes will result in step fines and penalties.
Tax Planning: If you calculate that you are greatly overpaying your Federal Income Taxes, you should increase the number of personal allowances on your W-4 Tax form. If you have too little taken out, you should decrease the number of personal allowances as you may owe money big-time when you file your return.
The best course is to adjust your withholding so your Federal Income Tax payments will match your actual tax liability. To Uncle Sam, you will neither a borrower nor a lender be. To make the change for your withholdings, file a new W-4 with your employer after first reviewing with your CPA or tax professional.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.
This information on Federal income taxes is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.