How to Fill Out Your W-4 Form
If you've ever struggled to understand the instructions on a W-4 form, this Tax Forum's for you. W-4 is the form you fill out when you start a new job that tells your payroll department how much to withhold in taxes. We'll walk you through those calculations today. We'll also take on a trader's mark-to-market question and explain the taxability of nonqualified stock options.
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I helped two people with roughly the same income ($15,000), one claiming zero exemptions on his return and one claiming one. There was a significant difference in the refund. Do you have any suggestions on what we are doing incorrectly?
-- Cpl. Douglas J. KarveckyDouglas, You're not doing anything incorrectly. It's all a matter of how much money you want withheld from your paycheck each pay period. More money withheld may mean a bigger refund in April. Less money withheld means more in your paycheck each week. It's your choice.
New Trader Wants to Mark to MarketRegarding this article Key Tax Deadline for Traders Comes Earlier Than Expected, what happens if 1999 was the first year you traded securities and you want the mark-to-market election to apply? Say you started trading in June 1999, you had already filed your tax return for 1998. Does that mean it's too late to make the election? -- Chris Hugo Chris, If you did not make the election on your 1998 tax return, you cannot mark to market your trades on your 1999 tax return. I'm sorry to say, the Internal Revenue Service is not giving anyone a break on that point. The mark-to-market election allows traders to value their securities as if they were sold for their fair market value on the last business day of the year. It's only a paper transaction, but it can be a key tax perk because it allows traders the option of taking an unlimited amount of losses, which can be used to offset any income. If you're interested in marking to market your trades in 2000, be sure to make the election with your 1999 tax return.
Stock Options and Social SecurityI know that income taxes will be withheld when I exercise stock options. What about Social Security contributions? -- Philip B. White Philip, Since you are having tax withheld on your options at exercise, I assume you're referring to nonqualified options. When you exercise nonqualified options, the difference between the stock's fair market value on the date of exercise and the actual exercise price is considered ordinary income. That spread will show up on your Form W-2 as compensation because, essentially, you are buying the shares from the company. (This is very different from incentive stock options, which are not taxed as compensation. See this previous Tax Forum for more on differences between incentive stock options and nonqualified options.) Since the spread is reported on your W-2, "the whole nine yards are withheld," says Rande Spiegelman, a senior manager in KPMG's investment advisory-services group in San Francisco. That includes federal and state taxes as well as FICA -- Social Security and Medicare. But don't forget, Social Security tax is 6.2% of the first $72,600 of wages for 1999. (The wage amount jumps to $76,200 for 2000.) There is no withholding on your W-2 income above that $72,600. Medicare withholdings have no limit though. So 1.45% will be withheld on all your W-2 income.
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