Tag: withholding

Posted on by Jan Roberg

W4 for Dummies

W4 forms can be confusing. Get help here.

The single most popular blog post I ever wrote was about how to fill out your W4 form. Unfortunately, it’s all garbage now with the new tax rules. It’s time to take a new look at how to fill out that W4 form.

First thing to know is that the form is kind of funky. If you look at the 2019 form, well here, take a look: 2019 W4 Form



Being realistic, you might not want your employer to know all that stuff about you. Seriously, is it any of your boss’ business how much income you have outside of work? Or how much you donate to charity? The IRS is already aware that this form is a problem and they’re working on a new one. So far, it’s only a draft and it looks like this: 2020 W4 Form

What I’d like to see on these forms is an option to just withhold a straight percentage. I think that would be the easiest thing to do, but the IRS doesn’t listen to me so we’ll have to work with what we’ve got. Let’s start with the easy ones.

Students

If you are a high school or a college student, and you expect to earn less than $12,000 for the year, you’ll want to claim “exempt”. All you do is write “Exempt” on line 7 of the W4. Leave line 5 blank. Leave line 6 blank. You don’t fill out any of those other pages. Give your employer the first page and you’re done. Easy peasy!

Single People With Only One Job

Whether you’re paid a salary or by the hour, if you are single and working full time, you’re going to check the box that says single and claim one allowance on line 5. That one is also easy.

Married People Where Only One Person Works

If you’re married, and your spouse does not work, you will check the box that says you’re married, and you will claim 2 allowances on line 5. That’s it.

And that’s the end of the easy answers. Let’s look at the harder stuff.

Unmarried People with Children who Always Qualify for EIC

If you have children and in the past you’ve always qualifed for the Earned Income Tax Credit, unless you just got a big raise, you’ll probably still qualify for EIC. In that case, you don’t need a whole lot of withholding. You’re going to check the single box and claim 2 allowances for yourself, plus 4 more for every child you have under the age of 17. You might not have any federal withholding taken out of your check, but in the event that your income is high enough to require some withholding, you should be covered. It’s safer than claiming “exempt” in case you do have some federal tax liability.

Married People with Children who Always Qualify for EIC

It’s harder to qualify for EIC when you’re married because if both spouses work, the second income often kicks you over the limit. If only one spouse is working, check the married box and claim 2 allowances for you and your spouse together, plus 4 more for every child under the age of 17. Same as above.

If you both work, it’s a little trickier. Have the higher income spouse “married but withhold at the higher single rate” with one allowance, plus 4 allowances for each child under the age of 17. Have the lower income spouse claim “married, but withhold at the higher single rate” with 1 allowance. This should protect you in the event that the second income kicks you out of the EIC tax credit range.

Multiple Jobs, High Income Earners, and Working Spouses

The absolute best thing to do in this situation is to use the IRS withholding calculator. Here’s the link: IRS Withholding Calculator

Once you get to that page, you’re going to want to click on the blue box that says “Withholding Calculator”. You’re going to want to have your most recent tax return and most recent pay stubs with you when you do this. The IRS withholding calculator asks a lot of questions, (full disclosure, it’s kind of annoying) but it’s going to give you the most accurate results.

Good Grief, I Can’t Stand it! Is There Any Other Way?

Okay, this is my cheater trick. Did you owe last year? If not, you probably don’t need to change what you’re doing. If you did owe, don’t change your allowances, just add additional withholding to make up the difference in tax that you owed.

For example: let’s say that you claimed single with 2 allowances last year but you wound up owing an additional $1,000 in taxes for whatever reason. If you get paid every other week, that means you get 26 paychecks a year. You’d take $1,000 divided by 26, so you’d have an extra $38.46 taken out of each check.

Of course, if you’ve only got 14 pay periods left in the year, you might want to withhold more now and change it in January. Or you could set the rate now and just make an estimated tax payment to cover the difference. Do what works best for you.

I Still Need Help

I get it, this is confusing. Literally hundreds of people asked questions on the old blog post. I had to quit answering them. I just could’t keep up. I have my regular clients to attend to and it was overwhelming. If you still need help, contact your tax advisor. If you’re already paying someone to do your taxes, they should be able to help you with your W4, and they’re going to know so much more about you than I will.

If you don’t have a tax advisor, you can call my office and I can help you with this, but I’m going to charge you $200 to prepare your W4. I would need your most recent pay stubs and your latest tax return.

Posted on by Jan Roberg

Tax Refund for Christmas 2013

82/365 - my christmas eve buddy.

Photo by B Rosen at Flickr.com

 

If you normally use your income tax refund to pay for your Christmas presents, listen up.  You’ve got a problem.

 

First, nobody is doing Christmas loans.  Remember when H&R Block and Jackson Hewitt used to provide loans against your refund?  Then the IRS changed the “debt indicator” which made it almost impossible for anyone to offer those loans.  A few companies provided Refund Anticipation Loans, (the loans where you got your refund in 1 or 2 days instead of two weeks) but they were few and far between.  Most people had to wait for two to three weeks to get their refund.

 

Now the IRS has announced that tax filing will be delayed—meaning that instead of accepting tax returns on January 21st like they had previously announced—they won’t accept returns until January 28th, and maybe not until February 4th.

 

What does this have to do with Christmas?  Well, if you’re putting holiday gifts on your credit card in the hopes of paying it off with your tax refund—you’re not getting your refund until mid to late February at the earliest.  If you can’t afford to pay your credit cards without your tax refund—you’ve got a problem.

 

So what other options do you have?   For some people, if you know that you’re going to have a refund on your taxes, you can change your withholding now so that you get more money in your paycheck.  If you’re reading this in October or early November, you’ve got a chance to put away some extra cash for presents.  If it’s already December by the time you see this—it’s probably too late.

 

Here’s something else you need to know.  If you have your taxes done by one of those corner shop tax companies, they will gladly take your money and tell you that they’re filing your return.  You might think that you’re filing on January 3 or 4th, but you’re not.  What they’re doing is “stockpiling” your return.  They hit a button, it gets sent to a big corporate server, but it just sits there until the IRS says they’re accepting returns.

 

Why is that important to know?  Because people think that they need to file early to get their refunds.  But those early returns are often wrong.  They’re missing information, or the software’s not fully functional yet.  The IRS needs time to work out the glitches and if the IRS is having glitches, so are all the other tax companies.  If you have the big green tax company send your tax return to their server and then you discover a problem with it, you can’t take your tax return back.   It’s too late.  And if your tax return is sent in with a mistake it could delay your refund for weeks, or even months.

 

There aren’t a lot of options out there for using your upcoming tax refund to pay for this year’s holiday gifts.  But you know what?  Christmas comes every year.  Every year!  Once you do receive your refund, it might be the only time in the whole year that you’ve got extra cash.  Take some of your refund money and stick it in the bank so you’ve got cash to pay for your 2014 Christmas.    Seriously, you never want to be dependent upon the IRS for you to have a Merry Christmas.

Posted on by Jan Roberg

How Can Social Security Be Out of Money If We Only Take Out What We Put In?

Photo by Scott at Flickr.com

I hear this question all the time.  We all put our own money into Social Security so how can it run out of money?

 

First, let me point out that Social Security is not out of money.  It’s estimated that it could run out of money by 2035 if changes are not made, but it is not out of money yet.  But, how could it run out of money if it only pays out what we pay in?  The problem is–and I hate to call this a problem, but we’re living too long.  (Like I said, hate to call that a problem.)

 

Let me use a real example of a real person.  I’ll call him Sam.  Over the years, Sam has paid $120,698 into Social Security.  His employers have paid $131,693.  So all together, $252,391 has been paid in.

 

According to Social Security, Sam will receive $2,611 a month in benefits.  At that rate,  Sam basically uses up all his money in just over 8 years.    ($252,391 divided by $2,611  =  96.66 months.  96 months divided by 12 months = 8 years)  So assuming that Sam retires at age 66, if he lives to age 75 then he’s used up all the money put in for him in the first place.

 

But you don’t quit getting social security when it runs out.  Social security payments go on until you die.

 

But what about interest?  Isn’t the money invested, shouldn’t it go farther?

Well yes, I did over simplify things.  The Social Security trust funds are invested in “special issue” securities of the US Treasury.  For 2012, the annual effective interest rate of return was 4.091%.  (But that’s because of some special circumstances, the actual rate right now is closer to 1.48%.)

 

There is no social security withholding on wages over $113,700.  Why can’t the wealthy just contribute more to social security?

I hear that all the time too–why not just have the higher income people keep contributing and eliminate the cap–but here’s a catch–if you are supposed to take out what you put in–then those higher wage earners are going to want to take out what they put in too.  Given that people are living longer than their benefits are holding out–do you really want people taking even higher benefits?  That would actually make the situation worse than it already is.

 

Let’s go back to Sam for our example.  If Sam lives to age 80, that’s 4 extra years of social security.  At his current rate of $31,332 a year, that’s an extra $125,328 more than what he originally paid in.    In reality, Sam earns well above the social security base wage.  Let’s say his contributions to social security are unlimited.   Based upon Sam’s “unlimited” contributions, when I run the numbers, I get Sam’s monthly payment to be close to $7,500 a month ($90,000 a year.)  Now if Sam lives an extra 4 years,   that’s $360,000 more than what he paid in.   So having the wealthy pay in more to social security actually costs more than keeping it capped like it is now.

 

So how do we “fix” social security? I wish I knew the answer to that one, but I don’t.

Posted on by Jan Roberg

Why Isn’t My Refund as Big as my Friends?


 

 

I get this question every year.  Why did my friend, neighbor, co-worker, relative, etc. get a bigger refund than I did?  And the honest answer to that question is:  I don’t know, I didn’t prepare their taxes.  But here are some common reasons why some people might get a bigger refund than you do.

 

1.  They withheld more.  That’s the simplest explanation.  Technically, you only get back if you overpaid your taxes.  So, people who withhold too much, get refunds.  If you get less, that actually means you win because you didn’t over withhold.  (But trust me, I know.  It really doesn’t feel like winning.)

 

2.  They qualified for the earned income tax credit.  EItC is one of those tax credits that you can actually receive even if you didn’t pay anything into the system.  But—there are many requirements—most notably you have to have earned income.  The EIC can make a huge difference in someone’s refund.

 

3.  College tax credits—the American Opportunity Credit can be worth up to $2,500 on someone’s tax return.  If your friend was attending school while you stayed home—that could be part of the difference also.

 

4.  Different filing statuses—if you’re single, you could be in a higher tax bracket than your married friend.  Or, if you’re married and your wife is also working—then you could be in a higher tax bracket than your single friend.  Even though two people have the same job and earn the same amount of money—their circumstances outside of work could have a huge impact on their tax refund.

 

5.  Different deductions—once again, it all has to do with things that happen outside of work.  A person renting an apartment could be paying higher taxes than someone paying a mortgage because of the mortgage interest deduction—or any number of other deductions.  There are just too many things to name.

 

6.  Income—The more money you make, the more tax you pay.  And people who make a lot of money have to pay the alternative minimum tax or AMT.

 

So, don’t waste your time worrying about your friend’s refund.  The important thing is to think about what your goals are.  Do you want a big refund?  If so, how big of a refund do you want and what would you do with it?

 

Or would you rather take home more money with each paycheck?  If so, what will you do with the extra take home pay?

 

But whether you choose a larger refund, choose larger take home pay, or maybe choose some middle ground; our job at Roberg Tax Solutions is to help you pay the least amount of tax while making smart decisions for yourself and your family.  As long as you’re doing what’s best for you, it really doesn’t matter what your friends are doing anyway now does it?

Posted on by Jan Roberg

Let the IRS Help You Pay for Your Vacation

Saving with the IRS.

If you have trouble saving money, then withholding extra in your taxes might be the way to put money away for a vacation. (Or whatever else you want to save for!)

 

 

Okay I can hear you now, “How can you get the IRS to pay for your vacation?”  That’s not what the title said; it says “help pay” for your vacation.  If I had a way for the IRS folks to pay for my vacation, I’d be blogging this from London instead of my living room.  (Olympics are on, I’m an Olympics junkie.  I’m working in front of the TV set today.)

 

But how can the IRS help you pay for your vacation?  By helping you save for it!

 

Face it; some people are great at putting money away and saving up for whatever they need.  This blog post isn’t for them.  This is for the folks that have trouble saving up for the things they want—like a vacation.  If you’re not a good saver, then this plan might work for you.

 

First, you need to figure out how much money you need for your trip.  I was looking at a little trip to Disney World, with my husband, Mark.   I think we can do it for $3,000.  Mark gets paid twice a month—so over the course of the year, he’ll get 24 paychecks.

 

(Yes, I’m using his paycheck for this example.  I’m self employed.  If I’m thinking about buying something with my own money I use “How many tax returns to I have to prepare to go to Disney World?”  But I don’t have withholding—I have to pay estimated taxes so this program will not work for me.)

 

So to save up $3,000 first we’ll have to figure out how much of a refund we’ve got coming (or how much we’ll owe) if we don’t make any adjustments.  So how do you figure that out?  You use the IRS withholding calculator.  Here’s a link:  http://www.irs.gov/individuals/page/0,,id=14806,00.html

 

You’ll want to have a copy of your latest pay stub and your last tax return with you when you do it.  Just go to the site, answer the questions, and it will tell you what your expected refund (or what you’ll owe) will be.

 

I did this back in February and it looks like we can expect a refund of just about $1,000 next year.  We will need to save another $2,000 for our Disney vacation.  Since we did this in February, that gave us 10 months to save up.  Let’s do the math:

10 months times 2 paychecks per month = 20 paychecks

$2,000 divided by 20 paychecks = $100 per paycheck

 

So for us to have adequate savings for Disney World, Mark would need to withhold an additional $100 per paycheck to give us a $3,000 income tax refund.

 

If you want to change your withholding, you’ll need to go to your human resources department and complete a new W4 form.  If you know exactly how much extra money you want to save, just put that dollar amount on line 6 of your W4:  http://www.irs.gov/pub/irs-pdf/fw4.pdf

 

If you’re just interested in getting a bigger refund, but don’t know who much extra you want to save, you can change the number of allowances you’re claiming on line 5.  For example, if you’re currently claiming 3 exemptions and your refund is very small, change your withholding to 2 exemptions and your refund will be larger (assuming that everything else on your tax return stays the same.)

 

Realize that if you do this, you will have less money to spend from every paycheck.  What you’re doing is making a trade off.  Money later versus money now.

 

I’m going to be perfectly honest with you—most tax professionals would never, NEVER, recommend saving money by letting the IRS hold it for you.  Two reasons:  the first argument is that you can save the money yourself and earn interest on it in a savings account.  My answer to that is—the interest rate on my savings account right now is .2491%.   If I had the whole $3,000 in the bank for the whole year, I would earn $7.47.  I think actually being able to save $3,000 is worth that price.  This isn’t such a good argument these days.

 

The second issue is a little more serious:  If the IRS is holding your money—you cannot access it until you file your tax return next year.  If you have a financial emergency, there’s no way for you to get your hands on that cash.  It’s important that you understand that.  The whole point in having the IRS hold your money is so that you can’t spend it, it’s a good idea to have a little savings cushion—but this is a strategy for people who aren’t good at saving, so there’s a bit of a catch 22.

 

Like I said, this strategy isn’t for everyone—but there are lots of people who use it and they use it successfully if saving money is a problem for you.

Posted on by Jan Roberg

Why Your Take Home Pay Looks Messed Up

Payroll check stub

Photo by Christopher Titzer

The number one question I’m getting these days (okay, besides how big will my refund be?) is “What happened to my take home pay?”  Hopefully, I’ve got some answers for you.

We’ve all heard that Congress voted not to increase our payroll taxes, but it looks like there’s more federal withholding being taken out of your paycheck.  What’s up with that?  Well, the income tax rate didn’t go up, but the “Making Work Pay” credit was taken out.  Because that credit it gone, your payroll withholding has gone up (somewhere between $400 and $800 per year depending on your filing status.)

The other change that we’ve heard about is that the Social Security withholding went down from 6.2% to 4.2%.  This makes your payroll withholding go down.  Depending upon how much you make, this might give you more take home pay than before, for others, it’s the opposite.  (Here’s a clue, the more money you make, the bigger this deduction will seem.)

If you get a pension, and not wages, the increase in the withholding will hit you harder because you don’t have social security withholding.

Now for many people, the payroll tax changes were not set up correctly for their first paychecks of the year.  Please don’t blame your payroll department; the changes came so late in the year, that computer programs were not programmed for the new rules.  This made for some crazy adjustments that showed up in later checks.  Hopefully, by now, your paycheck should be normal.

It’s always a good idea to check to make sure your payroll withholding is right.  The IRS has a withholding calculator that you can use to see if you’re on target for next tax season.  You might want to wait another week or so to make sure that all of the payroll adjustments are done and that you’ve got a “normal” check to look at before running the numbers through the calculator.  If you use a check with “adjustments” in it, the numbers will be crazy so make sure you’ve got at least two checks in a row that have the same withholding numbers in them.

Posted on by Jan Roberg

Checkpoint, How’s Your Withholding?

It's a good idea to just make sure that you are withholding enough tax from your paycheck.

It’s a good idea to just make sure that you are withholding enough tax from your paycheck.

 

I recently read an online forum where a fellow wanted to sue his employer for not properly withholding the man’s income taxes  from his wages.  While I felt sorry for the man and his looming tax debt, given some of the information he posted, I wasn’t convinced that the employer was at fault.  But the tax code and the forms are all pretty confusing, so how do you know that you are withholding correctly?  Fortunately, there is help.

 

First and foremost, if nothing has changed about your job or life situation and you’re happy with your refund/balance due situation, this isn’t for you.  If everything is fine, why change?  But–if you owed too much last April, or you had a job or lifestyle change, then you really should do a mid-year evaluation to make sure that your withholding is on track.  It’s a whole lot easier to change your withholding now than it is to make adjustments in December or after the year is already over.

 

What you need to do is have a copy of your latest pay stub and your last tax return handy.  You’ll need both to answer the questions in the calculator.  Then you’re going to click on the link to the IRS withholding calculator.

 

Now I’m going to be honest, the first time I looked at this I went, “Oh gee, who’d want to bother with this?”  But seriously, it’s the best program for figuring out where you stand with your taxes.  For most situations, I like it better than some of the fancy professional tax projection programs I’ve used.  Most importantly, you don’t need any special training to use it.  Just answer all the questions.  Sometimes you may have to guess, but do your best.  You really do need to have your latest pay stub and last tax return to do this though.  If you’re just estimating, it’s not going to be helpful.

 

The program will tell you, based on what’s actually been taken out of your check, how much your refund or balance due will be.  And, if you are expected to owe, it tells you how to change your withholding so as not have a balance due.

 

So let’s say you ran the program and it does recommend that you change your withholding.  What next?  That’s easy, take the information to your employer (or the payroll department) and fill out a new W4 form.  Unlike some other paperwork that can only be completed annually, you are allowed to change your W4 any time during the year.

 

So about that guy who wants to sue his employer?  I’ll leave that up to the courts.   As for me, I’d rather catch a problem before it gets out of hand, and the IRS withholding calculator lets me do that.