Quite often in my tax practice I see very large refunds being claimed every year, and sometimes (not as often) I see very large amounts of tax owed with the tax return. While a large refund isn’t necessarily a bad thing, it can be in your best interest to reduce the amount of your refund and receiving more take-home pay every month. After all, it’s your money, why should the IRS hold onto it for a year before you get it in your hands?
On the other end of the spectrum, a large tax bill when you file your tax return can cause some problems – if it’s routinely greater than $1,000, you may have additional penalties applied to the amount that you owe.
Recently the IRS issued their Summertime Tax Tip 2012-22, with tips on how you can reduce your large refund or large tax bill. The text of the Tip follows:
IRS Offers Tips to Reduce Big Refunds and Prevent Tax Bills
The Internal Revenue Service reminds taxpayers that it’s not too late to adjust their tax withholding to avoid big tax refunds or tax bills when they file their tax return next year.
Taxpayers should act soon to adjust their tax withholding to bring the taxes they must pay closer to what they actually owe and put more money in their pockets right now.
Most people have taxes withheld from each paycheck or pay taxes on a quarterly basis through estimated tax payments. Each year millions of American workers have far more taxes withheld from their pay than is required. Many people anxiously wait for their tax refunds to make major purchases or pay their financial obligations. The IRS encourages taxpayers not to tie major financial decisions to the receipt of their tax refund – especially if they need their tax refund to arrive by a certain date.
Here is some information to help bring the taxes you pay during the year closer to what you will actually owe when you file your tax return.
- New Job. When you start a new job your employer will ask you to complete Form W-4, Employee’s Withholding Allowance Certificate. Your employer will use this form to figure the amount of federal income tax to withhold from your paychecks. Be sure to complete the Form W-4 accurately.
- Life Event. You may want to change your Form W-4 when certain life events happen to you during the year. Examples of events in your life that can change the amount of taxes you owe inclue a change in your marital status, the birth of a child, getting or losing a job, and purchasing a home. Keep your Form W-4 up-to-date.
You typically can submit a new Form W-4 at any time you wish to change the number of your withholding allowances. However, if your life event results in the need to decrease your withholding allowances or changes your marital status from married to single, you must give your employer a new Form W-4 within 10 days of that life event. jb note: if you change your W-4 dramatically in the middle of a year, remember to re-calculate your withholding requirements at the beginning of the next year so that you are not withholding too little or too much as a result of your mid-year change.
- Form 1040-ES. If you are self-employed and expect to owe a thousand dollars or more in taxes for the year, then you normally must make estimated tax payments to pay your income tax, Social Security, and Medicare taxes. You can use the worksheet in Form 1040-ES, Estimated Tax for Individuals, to find out if you are required to pay estimated tax on a quarterly basis. Remember to make estimated payments to avoid owing taxes at tax time.
Publication 505, Tax Withholding and Estimated Tax, has information for employees and self-employed individuals, and also explains the rules in more detail. The forms and publication are available at IRS.gov or by calling 1-800-TAX-FORM (1-800-829-3676).