With over half the year already gone, now is a good time to check to see if you’re on track to have approximately the right Federal income tax withholding amount deducted from your paychecks.
The problem with not having the correct Federal income tax withholding amount for the year is that:
• If your taxes are significantly underwithheld for the year, you risk being hit with a nondeductible IRS interest rate penalty; and
• If your taxes are significantly overwithheld for the year, you’re basically making an interest-free loan to the government when you could be putting that money to work for you.
Neither situation is good. The simplest way to correct your Federal income tax withholding amount is by turning in a new Form W-4 (“Employee’s Withholding Allowance Certificate”) to your employer. Taking this action now will adjust the Federal income tax withholding amount that’s withheld from your paychecks for the rest of 2014.
How to Adjust Your Federal Income Tax Withholding Amount
Specifically, you can adjust your withholding by increasing or decreasing the number of allowances claimed on your Form W-4. The more allowances claimed, the lower the withholding from each paycheck; the fewer allowances claimed, the greater the withholding. If claiming zero allowances for the rest of the year still wouldn’t result in enough extra withholding, you can ask your employer to withhold an additional amount of federal income tax from each paycheck.
While filling out a new Form W-4 seems like something that should be quick and easy, it’s not necessarily so as tax rules are neither quick nor easy. Fortunately, there’s an online, Form W-4 calculator, that can help to make the job simpler. It’s pretty easy to use once you assemble information about your expected annual income and expenses, plus your most recent pay stub and tax return.
While the IRS calculator isn’t perfect, using the calculator to make withholding allowance changes on a new Form W-4 filed with your employer will likely get you closer to where you need to land for the year, especially if you believe you’re likely to be significantly under-withheld or overwithheld for this year.
Of course, if you want more precise results, consult with your Untracht Early advisor on your tax projection.