Don't give the IRS an Interest-free Loan

If you typically receive a substantial refund from the IRS after you file your income tax return, or you owe the IRS a substantial amount at that time, you should consider adjusting your withholding.

If you have too much withheld during the year, of course, you will receive a refund after filing your return. While everyone enjoys getting a refund, it in fact means you have made an interest-free loan to the government. You could have used the money during the year to generate income or for personal purposes. You should adjust the amount your employer withholds downward to increase your regular take home pay.

At the other extreme are taxpayers who have too little withheld and who owe substantial amounts on April 15th. While they enjoy the "extra" amounts received in each paycheck, the costs incurred for this enjoyment can far outweigh its benefits. Not only will you be paying back the amounts owed in taxes in April, but you will likely be tacking on extra in the form of penalties. If this describes your situation, you should adjust your employer's withholding upwards. (As a rough guideline, you should owe less than 10% of your tax bill come April.)

Unfortunately, the procedures for arriving at the proper withholding amounts are among the more complex ones taxpayers confront. Many factors play a role: exemptions, deductions, credits, marital status, your spouse's income, and others. The Form W-4 includes three worksheets that you may have to complete to determine the proper withholding. If you think your situation calls for a withholding adjustment (up or down) and you would like some guidance getting through this maze, please give us a call.