Tax season brings about a mix of emotions from the public. You have your happy taxpayers that look forward to this time like a kid about to open a Chanukah present. These are the people that consistently get a nice fat refund from Uncle Sam every year. Never mind that what you are actually receiving is your own money that you lent the government interest-free.
Every year around this time their life turns into an episode of Deal or No Deal. These people are just waiting for Howie Mandel to hand them the briefcase. They don’t know what’s in it until the tax accountant opens it up, but they know there is a number inside that briefcase, and it makes tax season very exciting for them. On the opposite side of the spectrum, you have your grumpy taxpayers. These are the people that know every year they owe the IRS a check. Whether it’s because they are self-employed or they purposely do not withhold enough, this group of people are expecting to shell out some cash. They’re not happy about it, but they expect it and deal with it. However, there’s a third group of people that barely gets mentioned. For this segment of the public, tax season brings about panic and terror. Why would tax season be so scary you may ask? If you are asking this, then you are definitely not a member of this group. But be careful, because if you aren’t, then you may be the next victim.
The reason why this third group is so scared every year is because at one point they used to belong to the first group. Life was good. Howie used to show up at their door every April 15th and deliver the briefcase to them. Only one year he didn’t show up. As the couple gleefully opened the front door to greet the lovable, germo-phobic funnyman, instead they found a much different character standing there waiting. Imagine the fear on their faces when they opened the door and saw a man dressed from head to toe in black with a ski mask and brandishing a weapon as he demanded several thousand dollars. Now replace the black garb with a white short sleeved button-down and a pocket protector, and replace the weapon with a calculator and this is what happened that black April day when the IRS unexpectedly showed up. The panic sets in, “How could this have happened? Last year we got back $1,000 and now we owe $4,000?” While it all seems so random when it happens, in reality something major changed in their tax position since last year, and they were never informed to change their withholding allowances on their W-4. With proper planning this disaster can be avoided and you can assure yourselves that you will be part of the first group with their happy, go-lucky tax seasons.
The W-4 form itself seems very simple. The form uses a system of allowances that are used to calculate the correct amount of tax to withhold. The more allowances you report on the W-4, the less tax will be withheld, meaning you receive more money in your paycheck. Many people just assume you take as many allowances as members of their family. Unfortunately, the reality of the tax world is much more complicated than that. There are many other factors that go into the calculation of your taxes. One thing to consider is the number of allowances your spouse is taking. If you are taking five allowances because you have three kids and your spouse is also taking five allowances, then you have a total of ten allowances and are probably under-withholding. Another scenario that often occurs is when there is a sudden increase in income from one year to the next. If the taxpayer is already not withholding enough and now the couple moves from a 15% tax bracket up to a 25% tax bracket then this can result in a hefty tax bill.
Because there are so many factors that go into trying to match up what should be withheld throughout the year to what you will actually owe come tax season, every taxpayer should reevaluate their withholding allowances on their W-4 each year. If this is done properly then there won’t be any surprise each April. One option is to just ask your tax accountant to project your tax refund/bill for the upcoming year based on last year’s information (assuming no major changes) and using your detailed paycheck stubs to calculate the amounts being currently withheld. Another option is to use the free withholding calculation on the IRS website at http://apps.irs.gov/app/withholdingcalculator/index.jsp. It’s only a 5 minute process and all you need to answer the questions are your previous year’s return and your current year paystubs and it will analyze your current situation and whether you are under-withholding or over-withholding.
By reviewing your withholdings on a yearly basis you can make sure that when you open that door each April you will know who will be visiting you.
Daniel Magence, CPA, Esq. is a principal at Pristine CPA Solutions, LLC (www.pristinecpa.com). Pristine CPA Solutions offers tax and accounting services to individuals and businesses of all sizes. He can be reached at [email protected] or (201)326-6908 if you have any questions, comments or are interested in using Pristine CPA’s services. Its tax season now, so feel free to contact us for a free consultation.
By Daniel Magence
