Do You Run Out Of Money Before You Run Out Of Month?

Monthly credit card billings with interest: $300.00. Monthly car payments: $335.00. Orthodontist bills: $125.00, monthly……per kid. Average mortgage payment with escrow: $1,500.00. Having a big federal tax refund last throughout the year…..PRICELESS!

Are you a typical American family using a forced savings awaiting your IRS refund every spring? Do you usually receive a large refund (more than $500) after doing your taxes? If so, you may be a victim of excess withholding, or more simply said, too much federal tax is coming out of your paycheck each month. By taking a few simple steps, you could receive those withheld dollars on a monthly basis!

How, you may ask, do I reduce my excess refund? By filing a new W-4 that increases your exemptions to the proper number. Overwithholding is the result of not claiming enough exemptions on your W-4. You can avoid this and reduce the amount withheld by claiming additional exemptions such as:

1. Estimated itemized deductions (i.e., mortgage interest, taxes, charities)
2. Deductible IRA, 401-K, SEP, Keogh contributions
3. Alimony payments
4. Non-reimbursed business expenses
5. Tax credits such as the child tax credit, education credits, dependent care credit, earned-income
6. Student withholding exempt status

Why do I not want a large refund? Having the money to invest during the year makes simple financial sense. By avoiding overwithholding, you get the extra money each month and will be able to spend it now, not after you file for a refund. The wise thing to do with the extra monthly money is to INVEST it.

When should I file the new W-4? As soon as your number of exemptions or itemized expenses increases or decreases, you should file a new W-4. It is best to adjust withholding if there will be a significant change in the tax you owe for the next year. New homeowners should be especially aware.

If you are a part-time employee or starting your first job in the middle of the year, it is very probable that you will have a withholding problem. Because the amount withheld from your paycheck is figured by taking your weekly pay and multiplying this by the 52-week pay period, switching jobs or working part-time subjects you to overwithholding. For example, if you work January 1 to July 31 (26 weeks), and your weekly pay is $2,000, your withholding will be based on $104,000, and not the $52,000 you actually made. To avoid this problem, ask your employer to calculate withholdings on what is known as the "part year" method if your workdays during the year are expected to be equal to or less than 245. This formula calculates withholding based on actual earnings rather than expected earnings over a full year of employment.

If you are a student and can be claimed as a dependent on another person's tax return, you can be exempt from all withholdings as long as you have made no more than $700 this past year. To claim exemption, you still must file a W-4 with your employer.

For more information call Geoff at:

Freeman and Company are Public Accountants with decades of tax practice experience and over 450 clients and businesses throughout Chester County. Call for an initial consultation today!