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 amount of Federal income tax withheld from your paychecks for 2014.
The problem with not having the correct amount of taxes withheld 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 withholding is by turning in a new Form W-4 (“Employee’s Withholding Allowance Certificate”) to your employer. Taking this action now will adjust the amount of Federal income tax that’s withheld from your paychecks for the rest of 2014.
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 on the IRS website at www.irs.gov that can help to make the job simpler. From the IRS home page, click on the “More …” link under “Tools.” Then click on the “IRS withholding calculator” link. You’ll see the entry point for the online calculator. It’s pretty easy to use once you assemble information about your expected 2014 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 underwithheld or overwithheld for this year.
Of course, if you want more precise results, consult with your Untracht Early advisor on your 2014 tax projection.