The automatic response
to that question is usually, "YES! It's
extra money!" But is it really
extra money? Below are some pros and
cons of receiving a tax "refund".
For many W-2 employees,
withholding taxes is the most efficient way to meet their yearly tax
obligation. Oftentimes, new employees complete Form W-4, the form that the human
resource or payroll department utilizes in order to determine how much to
withhold from each paycheck, on the first day of work. The information you enter on Form W-4 may
lead to withholding too much tax, which usually results in a tax refund. Great! Right? Well, the money that is "refunded"
was yours. The "refund" money is
money you are "refunded" without any interest, essentially giving the
government an interest free loan for a year. In the meantime, you could have used the money
to pay down debt, save for emergencies or retirement.
Alternatively, and what
most people fear, is that taxes may be owed on April 15th. Taxes will be due on April 15th if you do not
withhold enough or make sufficient tax payments during the year to satisfy the
tax due. There may also be penalties and
interest for not withholding enough. However,
you enjoy a higher paycheck each week. During the year, you may have set aside the
amount of additional tax that would be due in April in an interest bearing
checking account or CD, earning interest that would not have happened had you had
too much withheld. While interest rates
are currently low, that may not always be the case.
How do you know what
amount to withhold? The first step is to
take a look at your prior year tax return to see what has changed. Did you get married? Did you have a child? Did you buy or sell a house? Once you have determined what is the same or
different, take a look at your actual tax liability. The tax liability is not the refund or amount
owed, but the calculated total tax. You
will need to withhold at least 100% of the prior year tax liability (you may have
to withhold more if your adjusted gross income is above a certain threshold). To check if you are withholding enough, divide
your estimated current year tax liability by the number of paychecks in the
year.
Not paying anything at
tax time and not receiving a refund is true victory. Let me help you reach this
victory!
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Yeni Anaya is a Certified Public
Accountant at Nasif, Hicks, Harris & Co., LLP. Yeni can be reached via phone at (805)
979-9381 or e-mail at yanaya@nhhco.com.
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is for informational purposes only and should not be construed as an opinion or
legal, accounting, or tax advice provided by Nasif, Hicks, Harris & Co.,
LLP. This information is not intended to create, and receipt does not
constitute, a legal relationship, including, but not limited to, an
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prepared by professionals, the user should not substitute these materials for
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contained herein was not written or intended to be used (and cannot be used) by
any taxpayer for the purpose of avoiding penalties that may be imposed under
the U.S. Internal Revenue Code or any taxing authority.
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