Adjusting withholding on your income taxes can produce some surprising results. See how one taxpayer saved 44% in taxes by adjusting his withholding.
Starting a new job in the middle of the year? Use the part year withholding method to avoid excess tax withheld
When you file your W4 form with a new employer, this instructs the employer how much tax to withhold from your pay, based on a full year’s pay rate. There is a strategy you can employ that will reduce the amount of tax withheld from your pay – known as the part year withholding method. This method of tax withholding calculation takes into account that you are only working and earning for a part of the year, so your overall income will be less, and there would be less tax required. If you start working in the middle of the year (or worse, late in the year) the normal rate of withholding would result in significant over-payment of tax withheld. The standard tables used to calculate withholding make the assumption on each pay that you are earning at this rate over the entire period.
At this time of year, with a few months remaining on the calendar, it can be a good time to review your income and withholding to ensure that you will have enough in tax payments to ensure that you don’t get hit with underpayment penalties next year when you file your return. This can be a relatively simple activity – all you need to do is gather your most recent pay-stubs and all of your other income information together and produce an estimate of your tax burden. You’ll then compare the estimated tax with the amount of withholding and estimated tax payments that you’ve made up to date. To do the estimates, you can use the worksheets available within Form 1040-ES, as well as the IRS’s Withholding Calculator online tool. (click the links to go to the tool or form) If your withholding is significantly less than the estimated tax […]