Now is a good time to tweak how much money comes out of your paycheck for taxes in order to be surer of getting the refund you want, tax pros say.
With almost half the 2009 tax year still ahead for most of us, increasing our withholding just a few dollars now will help assure a bigger refund later if we want that. It also is a good time to have a bit less taken out to improve cash flow now if you are willing to settle for a minimal refund later.
There's a catch, of course. To make the change, you need to file a new Form W-4 Employers Withholding Certificate with your company's payroll people. Research shows most of us know we can and, from time to time, should do this, but almost none of us ever do that, says Jackie Perlman, a Tax Institute research analyst at H&R Block.
We probably know why too. The simple two-page form - one page of instructions and one with a few blanks to fill in - can be a little intimidating for anyone who doesn't deal with it often. Knowing that the IRS will provide a free 24-page booklet of supplemental instructions in Publication 919 doesn't make you think it gets easier.
There are faster ways to cut through the clutter, Perlman said.
"Start by figuring how large a refund you want," she said.
It can be larger than what you got back last time, smaller, or the same. It doesn't matter which. Each of us has our own good reasons for choosing any of those three. The point is, it is a target and you can manipulate your paycheck withholding to hit it.
Next, don't confuse exemptions - which are those $3,500 dollops of tax exempt income you, your married partner and the kids get every April just for being there - with withholding allowances, which are what you claim on the W-4. Withholding allowances are basically accounting guidelines that IRS and your payroll department work out to help calculate your take-home pay.
Most W-4 calculations start out based on one withholding allowance for each exemption you claim, but you can bump those allowances up or down to fit your circumstances. In fact, you probably should, especially if you or your married partner's incomes have changed recently, because some of the IRS formulas are easily knocked out of whack when life happens, researchers report.
There is an easy way to adjust your calculations for that too, Perlman said. Go online and plug your numbers into one of the good online withholding calculators that tax professionals and others offer for free. Those will ask questions designed to help you get handles on all the tax issues that may affect your refund. Maybe you'll qualify for a homebuyers or energy conservation credit, for example, which could help reduce what you need to withhold now.
Perlman, not surprisingly perhaps, said she's partial to an H&R Block calculator on the bottom half of this page. There's a similar calculator next to it for self employed people facing similar issues.
IRS also provides similar calculators at its site that get high marks from users. Just Googling for withholding calculators fetches up fistfuls others such as this one.