It seems like now more than ever, there are way too many things begging for your attention. You see that little red circle on your phone, and you have to check your incoming messages. TV Stations have crawls of information for you to read while announcers read information. We used to hate call waiting – now you can get a text while you’re on the phone while you receive an incoming e-mail…all while you’re standing in line at the grocery store.
Something as passive as income tax withholding might not get all the attention it deserves. That’s why it made this week’s moneydo.
We talked to our Tax Planning Team and they gave us some great insight.
The Overview
We operate under a “pay as you go” tax system which means both the Federal and State require that you pay income tax throughout the year AS your income is earned. Generally, there are two ways to satisfy your tax liability for any given year.
1. Withholding
2. Quarterly estimates, which are due April, June, September and January
You are required to pay in either 100% of the prior year’s taxes (110% if your adjusted gross income is over $150,000) or 90% of what you estimate the current year’s taxes to be. Your payments must be made each quarter. This is known as reaching safe harbor, and it helps ensure you do not pay any interest or penalties.
So, take a few minutes and consider what you’re withholding for tax from your paycheck. Consider these points:
Withholding:
· If you’ve been receiving a large refund every year when you file your taxes this may mean you have the ability to withhold less during the year.
· This will allow access to your funds sooner than waiting for your tax return to be processed and your refund received.
· Conversely, if you find yourself owing taxes every April 15th, you may want to increase your tax withholdings.
· If you’re an employee you can do this by adding additional withholding on a W-4.
· If you are a retired individual you can increase withholding from taxable retirement distributions or other sources of retirement income.
Life Changes:
· If your filling status changed you will want to make sure that you update your withholding amounts because your tax tables will be changing.
· For example, if you filed “single” in the prior year and will be filing married in the current year the tax brackets for which you are taxed on will widen, which might allow more income to be taxed at lower rates. This might impact how much you need withheld for the year.
Income Changes:
· When you anticipate your income to have a large change from the prior year it is important to know how much you currently have withheld or are paying in quarterly.
· You may not be required to pay any additional money in during the year, but it will help understand what tax bills could be due come April 15th.
· If your income for the current year is greater than the prior year, and as long as you meet the prior tax year withhold requirements, you do not have to pay the additional tax until you file your return.
Summary:
Now that we’re more than half way through the year it might be a good time to take a look at your income for the year and see how much you have withheld or have paid in quarterly. Have there been any changes from the prior year or where have you over/under withheld in the past? If so, you may want to adjust your withholding with your employer or on your IRA or even your social security payments.
