Time to Turn in New Form W-4 to Adjust FIT Withholding for the Rest of The Year

June 26, 2016

Now is a good time to identify whether you were either significantly under withheld or over withheld last year and figure out if you have experienced significant personal or financial changes in the past year that could impact your taxes. For those of you who are significantly under withheld, you risk being hit with an interest rate penalty. For those of you who are significantly over withheld, you are effectively making an interest-free loan to the government at a time when many folks are hurting for cash.

Identifying Possible Withholding Error Situations

You are most likely to be under withheld in the following situations:

  • You are married and both you and your spouse work.
  • You or your spouse hold more than one job at the same time.
  • You can be claimed as a dependent on someone else’s return.
  • You receive significant non-wage income (from interest, dividends, capital gains, alimony, and so forth).
  • You have self-employment income and owe self-employment (SE) tax.

On the other hand, you are over withholding in the following situations:

  • You received a refund last year and income and deductions are about the same this year.
  • You will have significantly lower income and/or higher deductions than last year, and/or will be entitled to credits that weren’t allowed last year.

Withholding errors can also be caused by personal or financial changes, such as the following:

  • Life events, including marriage or divorce, birth or adoption of a child, or loss of a previously eligible dependent.
  • A job change by either or both spouses, such as taking on a new job, retiring, or being laid off.
  • Changes in income not subject to withholding, such as dividends, interest, or capital gains.
  • Purchase or sale of a home.

How to Correct Withholding Errors

If you are an employee, whether you work for someone or for your own healthcare entity, the simplest way to correct for under withholding or over withholding of FIT is by turning in a new Form W-4 (Employee’s Withholding Allowance Certificate) to the employer to adjust the amount you’re withholding from your paychecks for the rest of 2016. As you may know, this is done by increasing or decreasing the number of allowances claimed on line 5 of Form W-4. The more allowances claimed, the lower the FIT withholding from each paycheck, and vice versa. If claiming zero allowances for the rest of the year will still not result in enough extra withholding, you can ask the employer to withhold an additional amount from each paycheck by entering the desired figure on line 6 of Form W-4.

The Form W-4 Drill

While filling out a new Form W-4 seems like something that should be rather quick and easy, it’s not necessarily so because your federal income tax provisions are neither quick nor easy. If your situation is the least bit complicated, it may be necessary to complete one or more worksheets (included in the Form W-4 instructions) to get a reasonably accurate fix on how many allowances should be entered on Form W-4. Specifically, the Form W-4 instructions include the following worksheets:

  1. Personal Allowances Worksheet—used to determine the proper number of withholding allowances taking into account your filing status, personal exemptions, the child tax credit (if any), and the dependent care tax credit (if any).
  2. Deductions and Adjustments Worksheet—used to further customize your FIT withholding by accounting for itemized deductions, other negative adjustments to taxable income, certain tax credits, and non-wage income.
  3. Two-earner/Multiple-jobs Worksheet—used if you have more than one job and/or your spouse who is also employed.

The completed worksheets are not filed with the employer or the IRS. Instead, they should simply be kept with your tax records.

Online Form W-4 Calculator

First of all, the IRS provides an online Form W-4 calculator that’s quick and easy to use. In fact, it’s so simple that you should be willing and able to use it without help. As long as you have some fairly basic information about your 2016 tax situation and your most recent pay stubs, you’ll do fine. You can find the calculator at www.irs.gov by searching for “IRS Withholding Calculator.”

Now for the big question: How well does the calculator work? I think it works pretty good—not really good or great, but it should be good enough for you to use with some confidence. However, I obviously make no representations as to how well it might perform in all the wild and crazy circumstances that can be encountered in the real world. Also, it won’t work if you are subject to self-employment tax, alternative minimum tax, or have significant investment income subject to lower capital gains/dividends tax rates or the net investment income tax, though it will pick up the additional 0.9% Medicare tax.

In any event, using the pretty-good calculator to derive a new W-4 withholding amount is probably better than doing nothing for those of you who appear likely to be significantly under withheld or over withheld. For those of you who are wanting better-than-pretty-good results, you can always contact a professional to do a more thorough job by performing an actual tax projection for you for the current year.

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