Penalty-Proof Your Tax Return
Adjust your tax withholding now to boost your take-home pay or to avoid underpayment penalties when you file your 2013 tax return.
When you file your tax return each year, the amount of tax withheld from your paycheck or submitted through estimated quarterly tax payments ideally should match the amount of tax you owe. In reality, that seldom happens.
Most Americans are addicted to tax refunds. This year, the average refund may break $3,000 -- that’s $250 per month. More than 75% of U.S. taxpayers give Uncle Sam an interest-free loan year after year. Doesn’t it make more sense to get your money when you earn it rather than waiting a year for a refund? Many of the remaining taxpayers end up owing money, and some have to fork over an extra 10% penalty for having too little tax withheld throughout the year.
Both situations are easy to remedy, but you have to act before the end of the year. Just file a revised Form W-4 with your employer. The more “allowances” you claim on the W-4, the less tax will be withheld; the fewer you claim, the more tax will be withheld. You can also ask your employer to withhold a flat amount from your paycheck.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
If you regularly get a refund, you’ve already banked most of it; you’ll still get a refund next spring. But you can stop the leakage from your last few paychecks of the year by adjusting your W-4 now. Worksheets that come with the W-4 can help you figure out the proper adjustment; you could also struggle through the IRS’s online withholding calculator.
Answer three simple questions (you’ll find the answers on your 2012 tax return) and we'll estimate how many additional allowances you deserve -- and even show you how much your take-home pay will rise starting next payday, if you claim the allowances on a new W-4. (However, this shortcut won’t be much help if your tax situation has changed since last year because, for example, you got married, have a new baby or switched jobs.)In that case, you might want to give the IRS withholding calculator a whirl.
Alternatively, if you expect that you’ll owe money when you file your 2013 tax return next spring, you can avoid an underpayment penalty by boosting your withholding now. You needn’t pay every penny of the tax you expect to owe. As long as you prepay 90% of this year’s tax bill, you’re off the hook for the penalty. Or you can escape its reach, in most cases, by prepaying 100% of last year’s tax liability. However, note that if your 2010 adjusted gross income topped $150,000, you’ll have to prepay 110% of last year’s tax liability to avoid a penalty. Taking these steps to boost your withholding at year-end will shield you from an underpayment penalty on your 2011 return no matter how much you actually owe when you file your return.
If you have both wage and consulting income and expect to owe money on your tax return, you’ll do better by boosting the taxes withheld from your last few paychecks rather than trying to make up the shortfall with your final estimated quarterly payment due January 15, 2014.
Taxes that are withheld are treated as if they were spread out evenly throughout the year, so that approach sidesteps an underpayment penalty; the estimated-tax-payment approach does not.
To continue reading this article
please register for free
This is different from signing in to your print subscription
Why am I seeing this? Find out more here
Block joined Kiplinger in June 2012 from USA Today, where she was a reporter and personal finance columnist for more than 15 years. Prior to that, she worked for the Akron Beacon-Journal and Dow Jones Newswires. In 1993, she was a Knight-Bagehot fellow in economics and business journalism at the Columbia University Graduate School of Journalism. She has a BA in communications from Bethany College in Bethany, W.Va.
-
Stock Market Today: Nasdaq Soars Ahead of Tesla Earnings
The EV stock rose nearly 2% ahead of its highly anticipated Q1 earnings report, due after tonight's close.
By Karee Venema Published
-
GM Stock Accelerates After Earnings Beat
General Motors beat expectations for the first quarter and raised its outlook for the year. Here's what you need to know.
By Joey Solitro Published
-
'Instant' EV Tax Credits Are a Hit: $580M Paid This Year
EV Credits Claiming federal electric vehicle tax credits at the point of sale is a new and popular option in 2024.
By Kelley R. Taylor Last updated
-
Retirees Face Significant Tax Bills Due to Fraud
Fraud A new report sheds light on how older adult scam victims end up with big tax bills and lost retirement savings.
By Kelley R. Taylor Last updated
-
Tax Day: Is the Post Office Open Late?
Tax Filing Tax Day means some people need to mail their federal income tax returns.
By Kelley R. Taylor Published
-
High Earners: Beware of These Illegal Schemes to Lower Taxes
Tax Schemes The IRS says high-income filers are targets for several illegal tax schemes.
By Katelyn Washington Last updated
-
Mailing Your Tax Return This Year? What to Know Before You Do
Tax Filing There are plenty of reasons not to mail your tax return this year, but here’s what you should know if you are.
By Katelyn Washington Last updated
-
IRS Warning: Beware of Smishing and 'Helper' Tax Scams
Scams Tax season is a time to look out for email and text message scams.
By Kelley R. Taylor Last updated
-
Most Expensive States to Live in for Homeowners
Property Taxes High property tax bills make the places on this list the most expensive states for homeowners to live in.
By Katelyn Washington Last updated
-
Don’t Miss This $2,500 Tax Break for Paying Your Student Loan
Tax Deductions Do you qualify for the student loan interest deduction this year?
By Katelyn Washington Last updated