Still Time to Act to Avoid Surprises at Income Tax Returns Filing Time
Even though only a few months remain in 2014, you still have time to take action!
Not having a sufficient amount of tax withholding from your payroll can result in owing more taxes than you expect when your income tax returns are filed. You should take steps now to avoid owing more taxes.
Having too much tax withheld from your payroll leaves you with less net “take-home” pay, but will be refunded to you if it is in excess of your tax liability when you file your income tax returns. This is commonly known as your “tax refund”.
Here are some actions you can take to bring the taxes you pay in advance closer to what you’ll owe when you file your tax return:
Adjust your withholding.
If you’re an employee and you think that your tax withholding amount will fall short of your total 2014 tax liability, you may be able to avoid an unexpected tax liability balance due when you file your 2014 income tax returns by increasing your federal and state payroll tax withholding amount with your employer.
If you are having too much tax withheld at this time, reducing your withholding amount may result in a higher net payroll.
Complete an updated Form W-4, Employee’s Withholding Allowance Certificate with the human resources specialist for your employer. Enter the additional dollar amount you want withheld from each paycheck until the end of the year on Line 6 of the Form W-4. You may also choose to decrease your withholding allowances on line 5 to have additional tax withholdings. You can have less tax withheld from your payroll by increasing your withholding allowances on line 5.
Change taxes with life events. You may need to change your tax withholding amount or allowances when certain life events take place. A change in your marital status or the birth of a child can affect the amount of taxes you owe. When these life events happen you should submit an updated Form W–4 with your employer or change the amounts of your estimated tax payments if you are self employed.
Be accurate on your W-4. When you start a new job and complete Form W-4 with the human resources specialist for your employer, it is important to accurately complete the form. Claiming too many withholding allowances on line 5 results in less tax withholding from your payrolls and subsequently you may not fulfill your tax liabilities and may owe a tax balance due when your income tax returns are filed. Not claiming enough allowances is not good either. The result is too much tax paid into the federal or state systems and less in your net payroll to meet your life expenses. Special rules apply if you work two jobs or you claim other tax credits on your tax return.
Pay estimated tax if required. If you receive income that’s not subject to payroll tax withholding, you may need to make quarterly estimated tax payments. This includes various income sources such as self-employment, interests, rental income and many others. If you expect to owe a thousand dollars or more in tax liabilities, and meet other conditions, you may need to make estimated tax payments to avoid owing additional taxes and penalties when your income tax returns are filed.