Are You Withholding Enough to Cover Your Tax Liability?

At this point in the year you may want to take a few minutes to make sure what is being withheld from your paycheck matches (or at least comes close to) your actual prior year federal tax liability.

If you’re having too much tax withheld, you are allowing the government interest free use of your money. If you’re not having enough withheld, you will owe tax at the end of the year and you may have to pay a penalty. Generally, a penalty will apply if your withholding and estimated tax payments total less than 90 percent of your current year’s tax liability or less than 100 percent of the previous year’s tax (110% if your adjusted gross income exceeds $150,000 and your filing status is married filing jointly).

But if you act now, you’ll still have time to get on track with your withholding and avoid any unforeseen tax surprises next year. You should pay particular attention to your withholding if you received a big refund check this year or if you had to make a significant tax payment with last year’s tax return.

Also, check your withholding if you had a significant change in your life this year, like marriage, divorce, birth or adoption of a child, purchase or sale of a home, or retirement. There is a good chance you’re not having enough withheld if you have more than one job, your spouse works, you have income not subject to withholding, such as rent, dividends, interest or capital gains, or you owe other taxes like self-employment or household employment taxes.

You can adjust the amount withheld from your paycheck by giving your employer a new Form W-4, Employee’s Withholding Allowance Certificate. You may need to pay estimated taxes using Form 1040-ES, Estimated Tax for Individuals.

Need help in figuring out whether you are withholding enough? Look at Publication 919, How Do I Adjust My Tax Withholding? Or check out the Withholding Calculator at:

http://www.irs.gov/individuals/article/0,,id=96196,00.html

With the help of current pay stubs and a copy of last year’s tax return, you can check to see if you are withholding the right amount. You can use the calculator results to fill out a new Form W-4. If you have a complex tax situation or would like further information regarding this topic or any other tax related issue, please contact Henssler Financial Tax & Accounting Division at 770-428-4025.

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