Last Chance to Fix Your Tax Withholding
Things are shaping up for a lousy income tax filing season next year. As Congress grapples with the impending fiscal cliff, lawmakers still haven't settled exactly what tax rules apply for 2012. Lots of tax rules that expired last New Year's Eve have yet to be resurrected. Did you know, for example, that as things stand now, for 2012 more than 25 million households that have never before had to worry about the alternative minimum tax will become its victims ... to the tune of around $3,500 in extra taxes, each?
USE OUR TOOL: Tax Withholding Calculator
We expect Congress to fix the AMT to steer around that financial collision. And, we expect many other expired tax provisions -- the above-the-line deduction for teachers, for example, and the right for those age 70 ½ and older to make direct charitable contributions from their IRAs -- to be restored. Even assuming that we're right, such changes will come so late in the year to guarantee that tax refunds are delayed next spring as the IRS struggles to reprogram its computers.
And, things could be worse. How would you like to have to wait more than a year to get your income tax refund? It's possible if a crook gets to your refund ... by stealing your identity and filing a phony tax return. If someone files a return with your Social Security number before you do, your legitimate return will be stopped in its tracks. You'll be lucky to get things sorted out within 12 months.
Unfortunately, such ID theft tax fraud is a booming business. A U.S. Treasury official told Congress earlier this year that the IRS could issue $26 billion in fraudulent tax refunds resulting from identity theft over the next five years. The IRS says that figure is too high, in part because the agency is stepping up its efforts to detect phony returns before checks are issued. That's the sort of good news. The certain bad news is that those efforts are likely to delay legitimate tax refunds owed to honest taxpayers.
We can't protect you from identity theft or a slowdown in tax return processing. We can, however, help you limit your exposure to financial harm.
How? By showing you how to limit or eliminate the overwithholding that puts you in the position of having to wait for a big tax refund. The less the IRS owes you, the less you have to worry about a delayed refund.
USE OUR TOOL: Tax Withholding Calculator
Most middle-class Americans continue to allow the government to claim more than its share every payday. The proof: the 104 million tax refunds the IRS issued this past spring. So far, refunds are averaging $2,927.
Yes, we love our tax refunds. But wouldn't it make more sense to get your money when you earn it?
If you agree that the answer is a resounding "yes," we have good news. It's easy to fix overwithholding. All you have to do is file a revised W-4 with your employer. The information on that little form determines how much federal income tax is withheld from your checks. The more "allowances" you claim on the W-4, the less income tax will be withheld.
Although time is short, there's still time to act for 2012.
Let's say you're on course to get an average-size refund again next spring. If you're in the 15% tax bracket (with taxable income between $8,700 and $35,350 if you file a single return or between $17,400 and $70,700 if you're married and file jointly), claiming an extra five allowances will reduce withholding by about $237.50 a month. So you'd get an extra $237.50 in your paycheck in December. You'd still get a fat refund next spring when IRS gets around to processing your return. But by fixing your withholding now, you'll also be getting fatter paychecks in 2013 while you wait.
How do you know how many allowances to claim? Worksheets that come with the W-4 will help, and you can get more-detailed instructions in IRS Publication 919, How Do I Adjust My Tax Withholding? Or you can struggle through the IRS's online withholding calculator.
The Kiplinger way
But we've got a better idea. If your 2012 and 2013 financial situation is likely to be similar to 2011's, take advantage of Kiplinger's Easy-to-Use Tax Withholding Calculator. Answer three simple questions (you'll find the answers on your 2011 tax forms), and we'll estimate how many additional allowances you deserve. We'll even show you how much your take-home pay will rise starting next payday if you claim the allowances on a new W-4.
Our quick-and-easy method is a rough guide, not gospel. And it's based on the assumption that your financial life hasn't changed dramatically. If you have a new baby, get a new job or have an adult child who qualified as a dependent in 2011 but won’t in 2012 or 2013, for example, the calculator won't reflect how such events will affect your tax bill ... and your tax withholding.
But for most Americans, our calculator will paint a reliable picture that should accomplish two important goals:
1) Get you motivated to grab a W-4 to pinpoint how many extra allowances you should claim; and
2) Get you more of your money as you earn it, rather than having to wait for a likely-to-be-delayed tax refund in the spring of 2013.
Most people fill out a W-4 when they first take a job and never think about it again. But you can change the number of allowances at any time. You probably should if you received a tax refund of $500 or more -- or if you owed more than 10% of your total tax bill when you filed your 2011 return.
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