When you file your tax return each year, the amount of tax withheld from your paycheck or submitted through estimated quarterly tax payments ideally should match the amount of tax you owe. In reality, that seldom happens.
Most Americans are addicted to tax refunds. This year, the average refund may break $3,000 -- that’s $250 per month. More than 75% of U.S. taxpayers give Uncle Sam an interest-free loan year after year. Doesn’t it make more sense to get your money when you earn it rather than waiting a year for a refund? Many of the remaining taxpayers end up owing money, and some have to fork over an extra 10% penalty for having too little tax withheld throughout the year.
Both situations are easy to remedy, but you have to act before the end of the year. Just file a revised Form W-4 with your employer. The more “allowances” you claim on the W-4, the less tax will be withheld; the fewer you claim, the more tax will be withheld. You can also ask your employer to withhold a flat amount from your paycheck.
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If you regularly get a refund, you’ve already banked most of it; you’ll still get a refund next spring. But you can stop the leakage from your last few paychecks of the year by adjusting your W-4 now. Worksheets that come with the W-4 can help you figure out the proper adjustment; you could also struggle through the IRS’s online withholding calculator.
Answer three simple questions (you’ll find the answers on your 2012 tax return) and we'll estimate how many additional allowances you deserve -- and even show you how much your take-home pay will rise starting next payday, if you claim the allowances on a new W-4. (However, this shortcut won’t be much help if your tax situation has changed since last year because, for example, you got married, have a new baby or switched jobs.)In that case, you might want to give the IRS withholding calculator a whirl.
Alternatively, if you expect that you’ll owe money when you file your 2013 tax return next spring, you can avoid an underpayment penalty by boosting your withholding now. You needn’t pay every penny of the tax you expect to owe. As long as you prepay 90% of this year’s tax bill, you’re off the hook for the penalty. Or you can escape its reach, in most cases, by prepaying 100% of last year’s tax liability. However, note that if your 2010 adjusted gross income topped $150,000, you’ll have to prepay 110% of last year’s tax liability to avoid a penalty. Taking these steps to boost your withholding at year-end will shield you from an underpayment penalty on your 2011 return no matter how much you actually owe when you file your return.
If you have both wage and consulting income and expect to owe money on your tax return, you’ll do better by boosting the taxes withheld from your last few paychecks rather than trying to make up the shortfall with your final estimated quarterly payment due January 15, 2014.
Taxes that are withheld are treated as if they were spread out evenly throughout the year, so that approach sidesteps an underpayment penalty; the estimated-tax-payment approach does not.
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