Tax Tip - Don't Pay Too Much Tax — or Too Little

With the year winding down, you may want to take a few minutes to make sure what is being withheld from your paycheck matches your actual 2003 tax liability. It's especially important in light of tax law changes enacted during this year.

If you're having too much tax withheld, that's money you can't use until you get your refund. If you're not having enough withheld, you will owe tax at the end of the year, and you may even 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 and less than 100 percent of the previous year's tax.

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 tax payment that was more than you could comfortably pay.

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. And 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, interest, dividends or capital gains, or you owe other taxes like self-employment or household employment taxes.

Some tax law changes this year may also have thrown your tax payments off track, although the result is probably in your favor. Lower tax rates and higher standard deductions for married persons will save you taxes — employees have already seen these tax cuts in their paychecks. Lower tax rates for capital gains after May 5, 2003, also apply to qualified dividend income for the whole year. If you had already planned for higher taxes on these items, you may be able to reduce your withholding or estimated tax payments.

You can adjust the amount withheld from your paycheck by giving your employer a new Form W-4. Or you may revise the estimated taxes you pay with Form 1040-ES.

Need help in figuring out whether you are withholding enough? Look at Publication 919, How Do I Adjust My Tax Withholding? With the help of current pay stubs and a copy of last year’s tax form, you can see if you are withholding the right amount. You can then use the calculator results to fill out a new Form W-4.

So go ahead and get on track with your withholding. It makes good financial sense to bring the tax you pay closer to the tax you owe. If you need any help you may contact our office and we’ll be glad to help. Info@financial-planning-strategies.com