If you don’t withhold enough in taxes each pay day, you may end up owing more money than you had planned come tax time. If you withhold too much, you may end up getting a large refund, but you, ultimately, give up more money each payday.

You have the option of working with your employer to adjust your withholdings each pay period. You can also figure your withholding if you have gotten married or divorced during the year, added a dependent, bought a house, changed jobs, or retired.

On the IRS website, there is a withholding calculator that will help you figure how much should be taken out of your pay each pay period. It will figure out the accurate amount of federal withholdings and gives you information to help you fill out your W-4, the Employee’s Withholding Allowance Certificate.  To find the calculator, go to the IRS.gov website and search for “withholiding calculator”. 

In order to use the withholding calculator, have the following items handy.

-Your most recent pay stubs.

-Your most recent federal income tax return.

 More tips for using the withholding calculator:

 -Fill in any information that applies to you.

-Make an estimate, if necessary. The results are only as accurate as the information you give.

-Check any links in the program if you have questions.

-Print the last screen. It gives you a summary of everything you entered with your calculations. You can use this to fill out a new W-4 if you need to, then give it to your employer.

-Keep the form you printed and a copy of your W-4 for your tax records.

The withholding calculator is a helpful resource for most people because it makes the process of figuring out your withholding so much easier.

If you are self-employed or are required to have an alternative minimum tax, or if your job is ending before the end of the  year, you will get a more accurate figure by taking a look at Publication 919, How Do I Adjust My Tax Withholding. The publication can be found at www.irs.gov or by calling 1-800-829-3676.

 If you have additional questions about tax withholding, contact a tax professional. 

Daniel Stoica Accounting Professional

More than half of the people who filed their taxes got refunds this year, a little more than usual, but the amount of those refunds has surged over the last ten years. Many Americans have overpaid on their taxes throughout the year to get a larger refund at tax time.

Last year’s refunds averaged over $3,000, and this year’s average is not far behind, according to the Internal Revenue Service. This is nearly twice as much as the $1,700 average from 1999.

Current tax data from the IRS shows the growth in refunds hasn’t been limited to any one income level. People who suffered job or investment losses during the recession overpaid inadvertently, giving them bigger refunds.  The past decade also brought short-lived tax benefits where many taxpayers may not have adjusted their withholdings. A few examples include: the American Opportunity Education Credit; the Home-Buyer Credits; and the Expanded Child Credit.

Tax professionals and other financial advisors often frown on large tax refunds because they add up to interest-free loans to the government, thereby reducing investment capital in the same amounts. Many advise that it’s better to have the money in hand every month and invest it, spend it or just let it earn interest.  To many Americans, thought, a $3,000 check looks a lot better than $3,000 coming out of their paychecks over the year.

If your refund seems too big or too small, fixing it usually means making changes to your W-4. It’s the form your employer uses to figure withholdings on your paycheck. Amending it involves three worksheets and two tables, which is sometimes overwhelming to the average person.

The W-4 can be a headache even for people familiar with the 1040. A withholding allowance isn’t the same thing as an exemption. It’s intimidating for even the most seasoned taxpayers. If you aren’t comfortable filling out your own W-4, don’t try. It’s better to hire a tax professional.

If you pay a professional to do your taxes, he or she will most likely give you free help with your W-4. Most accountants do offer it. H&R Block doesn’t charge to fill out your W-4, if you are using them to prepare your taxes. Turbotax has a W-4 feature as part of its software program. The IRS also offers a withholding calculator at the IRS website. Make sure you have your paycheck and your tax return when you have this done to avoid any complications or delays.

Daniel Stoica Accounting Professional

Tax Topic 412 – Lump–Sum Distributions

If you receive a lump-sum distribution from a qualified retirement plan or a qualified retirement annuity and you were born before January 2, 1936, you may be able to elect optional methods of figuring the tax on the distribution. These optional methods can be elected only once after 1986 for any eligible plan participant.

A lump-sum distribution is the distribution or payment, within a single tax year, of a plan participant’s entire balance from all of the employer’s qualified pension, profit-sharing, or stock bonus plans. All the participant’s accounts under the employer’s qualified pension, profit-sharing, or stock bonus plans must be distributed in order to be a lump-sum distribution.

If the lump-sum distribution qualifies, you can elect to treat the portion of the payment attributable to your active participation in the plan using one of five options:

1. Report the part of the distribution from participation before 1974 as a capital gain (if you qualify) and the part of the distribution from participation after 1973 as ordinary income.
2. Report the part of the distribution from participation before 1974 as a capital gain (if you qualify) and use the 10-year tax option to figure the tax on the part from participation after 1973 (if you qualify).
3. Use the 10-year tax option to figure the tax on the total taxable amount (if you qualify).
4. Roll over all or part of the distribution. No tax is currently due on the part rolled over. Report any part not rolled over as ordinary income.
5. Report the entire taxable part as ordinary income.

You should receive a Form 1099-R (PDF) from the payer of the lump-sum distribution showing your taxable distribution and the amount eligible for capital gain treatment. If you do not receive Form 1099-R by January 31st you should contact the payer of your lump-sum distribution.

You may defer tax on all or part of a lump-sum distribution by requesting that your employer directly roll over the taxable portion into an Individual Retirement Arrangement (IRA) or to an eligible retirement plan. You can also defer tax on a distribution paid to you by rolling over the taxable amount to an IRA within 60 days after receipt of the distribution. A rollover, however, eliminates the possibility of any future special tax treatment of the distribution. Refer to Topic 413 for more information on rollovers. Mandatory income tax withholding of 20% applies to most taxable distributions paid directly to you in a lump-sum from employer retirement plans regardless of whether you plan to roll over the taxable amount within 60 days.

Tax Topic 306 – Penalty for Underpayment of Estimated Tax

The United States income tax is a pay-as-you-go tax, which means that tax must be paid as you earn or receive your income during the year. You can either do this through withholding or by making estimated tax payments. If you do not pay your tax through withholding, or do not pay enough tax that way, you might also have to pay estimated taxes. If you did not pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax. Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller. There are special rules for farmers and fishermen. Please refer to Publication 505, Tax Withholding and Estimated Tax, for additional information.

Generally, the payments should be made in four equal amounts to avoid a penalty. However, if your income is received unevenly during the year, you may be able to avoid or lower the penalty by annualizing your income and making unequal payments. Use Form 2210 (PDF), Underpayment of Estimated Tax by Individuals, Estates, and Trusts, to see if you owe a penalty for underpaying your estimated tax.

The penalty may be waived if:

1. The failure to make estimated payments was caused by a casualty, disaster, or other unusual circumstance and it would be inequitable to impose the penalty, or
2. You retired (after reaching age 62) or became disabled during the tax year for which estimated payments were required to be made or in the preceding tax year, and the underpayment was due to reasonable cause and not willful neglect.

Please refer to the Form 1040 Instructions or the Form 1040A Instructions for where to report the estimated tax penalty on your return.