Friday, 6 January 2012

Tax Time – Withholdings on Target?

From Guest Contributor Ila Zimmerman

For the last 10 years I have prepared tax returns on weekends for a couple hundred clients. No matter how much income individuals make, they always welcome a tax refund and scorn paying more taxes. The tax refund is like a gift from the government even though it is your money.

If you want to make every frugal penny count, calculate what your tax liability is going to be and make sure you are withholding just enough each paycheck to cover your tax liability. The government provides the W-4 form and instructions to help you project your withholdings for the year. Withholding more than your liability is simply letting the government use your money for free instead of you earning interest on it. When I don’t see the money in my paycheck, it’s much easier not to spend it. To get a chunk of money all at once seems to have lots of possibilities. With your tax refund, you might be able to invest in an IRA and save yourself a little more. Or maybe you can pay off debt, pay cash for a trip or an electronic gadget instead of putting it on a credit card.

On the other hand, it can be very stressful if you do not have enough taxes withheld and have to pay the government more money when you file, especially if you do not have the money and/or if you have to pay a penalty. Generally, if you have at least 90% of what you owe in taxes withheld or 100% of what you paid last year (110% for higher incomes) then you will not be assessed a penalty. The penalty is an interest charge on the portion of taxes you did not have withheld throughout the year and is based on your federal tax rate. If you don’t pay the money you owe by the return due date or if you don’t file a return and owe money, then the interest charge can climb to 25% or greater. Bottom-line: Pay your taxes on time.

Finally, if you have a refund and do not file your return for three years, you will not get the refund. But if you owe, the balance due will not go away. Specific questions about taxes? Go to ilazimmerman.com. I would be happy to help you determine a comfortable withholding amount, help reduce your tax stress and help make your tax time a pleasure.

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