Tax Tips: Check Your Withholding

Make sure enough is being withheld from your paycheck or risk getting an unpleasant surprise come April 15.
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Tax day is a long way off. But if you want to avoid the annual April angst -- or at least tone it down to some mild agita -- you can take action now.

With that in mind,

TheStreet.com

is running a five-part series about year-end tax tips to lower your 2007 tax bill.

The first order of business is to check your payroll withholding, the mechanism through which most working Americans pay the majority of their taxes. If you are having too much withheld, you'll get a hefty refund at tax time. That may seem like good news, but in essence you have granted Uncle Sam an interest-free loan when you could have been investing the money and potentially generating a return during the year.

On the other hand, if you have too little withheld, you could get an unpleasant surprise when you see the bottom line on your tax return. (Even more unpleasant: the prospect of paying IRS penalties if you've significantly underestimated how much to withhold.)

You can forecast how your withholding will pan out this year by checking with a tax accountant or by using the IRS' free

withholding calculator. Alternately, run the numbers with a program such as Intuit's

Turbo Tax.

If it looks like you'll have too much withheld at the end of the year, consider claiming more allowances to reduce the amount that's withheld from each paycheck. The more allowances you claim, the less income tax will be withheld. Your accountant or the IRS calculator can help you determine how many allowances to claim. And then you can change the number you claim by filling out a new

W-4 form and submitting it to your employer.

Likewise, if you aren't having enough withheld, consider claiming fewer allowances on your W-4.

For example, each member of a married couple ordinarily would claim two allowances, assuming both spouses work. But say one spouse, in addition to her day job, moonlights as a freelance graphic designer. She is paid for that work as an independent contractor, meaning no taxes are withheld from her payments. She'll have to pay tax on those earnings at the end of the year. One way to ease that year-end tax hit would be for her and her husband to reduce the number of allowances they claim. That way, more income tax would be withheld at their day jobs.

If reducing your allowances doesn't solve the problem, you can also request that a specific amount be withheld from each paycheck -- something the couple in the example above might well choose to do. For example, if you'd like to have an additional $1,000 withheld this year and there are five pay periods left in the year, ask your employer to withhold an additional $200 from each paycheck.

Coming up next: Max out contributions to tax-advantaged retirement accounts

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Michaela Cavallaro writes about personal finance, business and food from her home in South Portland, Maine.