MoneyDo: Understand Your Tax Withholding.
Now more than ever, it seems we have way too many things begging for our attention. There’s that little red circle on your phone. TV Stations have crawls of information for you to read while announcers read even more information. We used to hate call waiting – now you can get a text while you’re on the phone while getting an incoming e-mail…as you stand in line at the grocery store.
Something as passive as income tax withholding might not get all the attention it deserves. Given the size of its impact, and our encouragement to know what you own, we give you this week’s Moneydo: Understand your tax withholding.
Both the Federal and State require income tax gets paid throughout the year as your income is earned. Generally, there are two ways to satisfy your tax liability for any given year:
- Quarterly estimates, which are due April, June, September and January
You’re required to pay taxes on a safe basis, defined as 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. Paying on a safe basis helps ensure you don’t pay any interest or penalties.
With the many recent changes to withholding tables, it’s important to verify your federal and state withholding elections for 2019. Take a few minutes and consider what you’re withholding for taxes from your paycheck. Consider these points:
- If you’ve been receiving a large refund every year after you file your taxes, you may have the potential to withhold less during the year.
- Withholding less will allow access to your funds sooner than waiting for your tax return to be processed, and then having your own money sent back to you in the form of a refund.
- Conversely, if you find yourself owing taxes every April 15th, you may want to increase your tax withholding.
- If you’re an employee, you can change your withholding by changing your elections on a W-4 form.
- If you’re retired, contact your advisor and have additional money withheld from your taxable retirement distributions.
- You also have ability to have taxes withheld on your social security payments.
The benefit of tax withholding is the payments are paid evenly throughout the year. If your withholding has been less than needed, you can increase it for the remainder of the year to avoid underpayment interest that results from being under-withheld for the first part of the year.
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 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.