Withholding

         
         
         
                                Withholding
         
         
          6) Don't give the government an interest-free loan
          every year.  Most people are happy to receive a big
          refund every May or June.  But this means that you've
          given the government the use of your money, interest
          free, for an entire year.  There's no reason to do
          this.  You should have less money withheld from your
          paycheck.  Get a new Form W-4 from your employer and
          claim some additional exemptions.  Claim an exemption
          for yourself and each dependent, and claim another
          exemption for each $2,450 you have in itemized
          deductions, tax shelter losses, business exemptions,
          and IRA contributions.  Your employer has to tell the
          IRS when you claim more than 14 exemptions, because a
          number of taxpayers are improperly claiming exemption
          from withholding by asserting too many exemptions on
          their W-4s.  Don't be intimidated into claiming fewer
          exemptions.  Just be sure that this year's withholding
          equals the lesser of last year's tax bill or 90% of
          what you probably will pay this year.
               Many people try to tell you that you cannot claim
          a high number of exemptions.  You can, but your
          employer must report that to the IRS.  You might get a
          telephone call from the IRS asking about your number of
          exemptions.  If you do, simply pull out your worksheet
          and explain why so little tax should be withheld from
          your paycheck.  If it appears during the year that
          there is underwithholding from your paycheck, you can
          file another W-4 and have more withheld.  Your employer
          probably won't like it but will have to abide by the
          new W-4 you file.
         
          7) Estimated tax payments going to be too low?  Don't
          increase them.  The tax law says you have to pay your
          tax bill in equal installments during the year.  If you
          earn more money than expected and your estimated tax
          payments for the first half of the year are too low,
          you'll have a penalty for underpaying taxes.  A way to
          avoid this penalty is to increase withholding taxes on
          your salary as soon as you notice that the estimated
          taxes won't be enough.  The tax law presumes that
          withholding payments are made evenly throughout the
          year, even if they weren't.  By raising withholding
          payments long enough to bring your total required
          prepayments up to the minimum level, you avoid the
          penalty.
         
          8) Underpayment penalties still can be avoided if your
          estimated payments don't equal your tax bill.  There is
          no penalty if your estimated payments plus wage
          withholding are equal to at least 90% of this year's
          tax liability.  You also avoid the penalty if your
          prepayments at least equal last year's tax bill.  So if
          you are in a period of increasing income, the best way
          to avoid the estimated tax penalty is to divide last
          year's tax bill by four and make that the amount of
          this year's quarterly payments.
               A simplified estimated tax schedule is available
          for high income taxpayers beginning in 1994.  A high
          income individual is someone whose adjusted gross
          income for the prior year exceeded $150,000 ($75,000
          for married filing separately).  Such individuals can
          avoid the penalty for underpayment of estimated taxes
          if their quarterly estimated tax payments equal at
          least 110% of the prior year's tax.  Other individuals
          still can avoid the penalty by prepaying either 90% of
          the current year's tax or 100% of last year's tax.
         
          9) If the underpayment situation is really desperate,
          but you can come up with the cash within 60 days, a
          pension plan rollover may save you.  With the 20%
          withholding tax on pension plan rollovers effective
          January 1, 1993, this technique is brand new.  What you
          do is take enough money out of your plan to have the
          20% withholding tax be sufficiently large to cover your
          tax prepayment shortage.  It counts towards your total
          withholding for the year when you do your tax return.
          And as long as you pay the pension plan withdrawal
          (including the 20% that was withheld) into a new plan
          within 60 days, there is no tax penalty.  So what you
          have is a loan of the withheld money to cover your
          underpayment penalty.  Obviously you may lose a bit of
          interest on the pension plan with this transaction, but
          that is going to be a whole lot less than the penalty
          for underpaying your estimated tax.  Just be sure you
          get the full amount of the money back into a pension
          plan within 60 days, or you are going to have a much
          worse problem than the one you started with, because
          you will then pay income tax on the entire withdrawal
          and a 10% premature distribution penalty.