With over half the year already gone, now is a good time to check to see if you are on
track to have about 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.
- If your taxes are significantly overwithheld for the year, you are 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 is 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 would still not
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 - because the tax rules are neither quick nor easy.
Fortunately, there is 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 will 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.
Please understand that the IRS calculator is not perfect. (Remember, it's free, and to
some extent, you always get what you pay for.) However, using the calculator to make
withholding allowance changes on a new Form W-4 filed with your employer is probably
better than doing nothing, especially if you believe you are likely to be
significantly underwithheld or overwithheld for this year.
Of course, if you want more precise results, we would be happy to put together a 2014
tax projection for you. At the same time, we can probably recommend some planning
strategies to lower this year's tax bill. Contact us for details.
This publication is distributed with the understanding that the author, publisher and
distributor are not rendering legal, accounting or other professional advice or
opinions on specific facts or matters, and, accordingly, assume no liability
whatsoever in connection with its use. The information contained in this newsletter
was not intended or written to be used and cannot be used for the purpose of (1)
avoiding tax-related penalties prescribed by the Internal Revenue Code or (2)
promoting or marketing any tax-related matter addressed herein. © 2014