Getting organized for income tax time
The importance of the W-4 and being prepared for income tax season.
How is your W-4? When was the last time you looked it over – when you started your job? It is never too late to check to see if you are taking the correct number of allowances. According to Michigan State University Extension, it is particularly important to check at the beginning of a new year.
The purpose of the W-4 is so that your employer can deduct the correct amount of federal income tax from you paycheck. The 2013 W-4 expires on February 17, 2014. Check Publication 505 Tax Withholding and Estimated Tax for the instructions.
Understand that if another person can claim you on his or her tax return, you are not allowed to claim an exemption from withholding if your income exceeds $1000 and includes more than $350 in unearned income such as interest or dividend income.
It is possible to claim fewer or zero allowances. In the case of regular wages, withholding must be based on the number of allowances claimed and not a percentage or a flat amount of the wages.
The Head of Household allowance is defined as the person being unmarried who pays more than 50 percent of the costs of keeping the home for themselves and dependents or other qualified individuals. For further clarification check Publication 501 Exemptions, Standard Deduction, and Filing Information for information.
It is possible to take projected tax credits into account when figuring the number of allowable withholding allowances. These tax credits include child and dependent care, and child tax credit. Publication 505 has further information on how to convert other tax credits into withholding allowances.
Nonwage income is defined as income derived from interest and dividends. If a large portion of the income comes from one of these sources, consider filing an estimated tax payment form 1040-ES. If this form is not used and payment is not made, there will be additional taxes owed. Having pension or annuity income may require an adjustment on Form W-4 or Form W-4P so that adequate taxes are taken from the income.
If there are two wage-earners or there are multiple jobs, this needs to be analyzed as well. If there is a working spouse or there are multiple jobs, consider taking all of the allowances on one W-4 form. The reason is that there may not be enough taxes take out of each the multiple wages. To better calculate the number of allowances, take all of the allowed exemptions on the highest paying job. Then claim zero (0) allowances on the other jobs.
There are definite times to check your W-4. One example is when your marital status changes. Another time to check your W-4 is when you add someone new to your household. Additionally, it is important to review the W-4, when there is a death of a spouse. A fourth time to check the number of allowances on the W-4 is when a child gets married or becomes independent.
So…when was the last time you checked your W-4? It is never too late to get organized for the income tax season.