MARCH 5TH, 2010
By CPA SAM
Q. My husband works for a large company, and I receive disability and do not work. We just had our taxes done this week and got quite a shock! We had a federal income tax refund of over $4000, but owed state tax of $1000 and local taxes of $600. We are in PA. How can we adjust our withholding so that this does not happen again next year?
A. When payroll people hear the Pennsylvania, they run screaming from the room. The local tax debacle there is the stuff legends are made of. In most states, when someone has too little withholding, an employee can simply get a copy of the state’s W-4 equivalent, and reduce the number of allowances claimed. This has the effect of increasing the amount of income subject to tax and thus increasing the tax withheld. Unfortunately, in PA, there is no W-4 equivalent. PA is calculated as a flat percentage of taxable income, 3.07% to be exact. I’m not sure where to point you on this one. Did you have non-wage income like dividends or capital gains that were not taxed? Do you have a small business on the side where there were no estimated payments made? Perhaps the payroll system at your husband’s employer has a way to allow for additional withholding beyond the standard percentage.
For the local tax, there is again no W-4 equivalent in most cases. However, there is very likely an obvious cause for this under withholding. In PA, employers are required to withhold where the employee works. If he works in a different jurisdiction than the one he lives in, then the withholding rate will be lower. He will have the non-resident rate applied to his wages. In most cases for PA, the resident rate is 1% (could be higher) and the non-resident rate is half of that. Therefore, he could have only half as much tax taken from his check as was required. If an employer opts to withhold at the higher resident rate, it is called courtesy withholding. Not all employers wish to do this because of the extra record keeping requirements. Check with your employer to see what is possible with regards to increasing the local tax withholding as well.
JUNE 3RD, 2009
By CPA SAM
Q. First, please explain the notes on line G of the W4 that talks about what to put on the form for children using different income levels. Secondly, I claimed 8 allowances last year and there were no taxes taken out of my check. This year when I complete the form it shows 9 or 10 (bought a house). How does that work, if 8 had already put me at no taxes?
A. See form W-4 before reading this explanation. Most of the credits enacted in the last few years are phased out for higher income earners. Line G of the Form W-4 deals with child tax credits and these credits are no different. The credit begins to phase out when Adjusted Gross Income (AGI) reaches the following levels:
- Married Filing Joint: $110,000
- Single and Head of Household Filers: $75,000
- Married Filing Separately: $55,000
To accommodate the reduction in the credit, you need to reduce the number of allowances you claim towards that credit. This makes your withholding increase but is correct because you will receive less credit and owe more in tax. Therefore your withholding needs to increase anyway. Those under the income threshold will still be able to claim extra allowances since they receive the full credit.
Regarding your second question, the number of allowances you claim should not be based on the number it takes to get your withholding to zero for federal purposes. In your case, you bought a house. If the mortgage qualifies, that means you now get to claim property taxes and mortgage interest on the itemized deduction form of the 1040. Normally, this reduces taxable income and thus you get to claim more allowances. If you think about it, now you have extra deductions available to absorb any salary increases that may happen in the future. Talk you to tax preparer or CPA if you have specific questions regarding your situation.
MAY 20TH, 2009
By CPA SAM
Q. Is it illegal to claim exempt status on my W-4 for a couple of paychecks?
A. To get the answer to your question, we need to examine the statements on the W-4 relating to the exempt status. Exempt means you will have no federal withholding on your paycheck. It does not affect Social Security and Medicare withholding. To be exempt, the form requires that you verify the following two conditions:
- Last year I had a right to a refund of all federal income tax withheld bec ause I had no tax liability and
- This year I expect a refund of all federal income tax withheld because I expect to have no tax liability.
If you are not able to say yes to both statements, look carefully at the statements at the bottom of the form, “Under penalties of perjury, I declare that I have examined this certificate and to the best of my knowledge and belief, it is true, correct, and complete.” If you are willing to accept the risk detailed in the “jurat” statement at the bottom of the form, then it is fine to do this. But let’s think about this carefully. Are you only going to meet the qualifications for exempt for two weeks? If you have knowledge that you will not be eligible for it for the rest of the year, then you should not do it.
If you meet with your tax advisor or CPA, they will be able to help you claim the correct amount of allowances for your situation to keep a constant withholding number for the entire year. If you are a commission-only employee and your commissions vary widely, then it is still best to complete your W-4 claiming the number of allowances to which you are actually entitled. Using Publication 919 later in the year, you can get a good idea if your withholding will be too much or not which will give you an idea if you should adjust your W-4 for the remainder of the year.
Q. I recently got married in April. My wife is starting her job next week. In the past I have claimed 4 witholdings and usually get around $1,500 -$2,000 back each year. Need some help in determining if I need to adjust my withholdings… if so … how much. Also… how many withholding should my wife have taken out of her paycheck.
A. This is one of the most frequently asked questions. Unfortunately, it is not possible to answer without knowing your entire situation. I can tell you that you both need to complete a Form W-4. This form tells your payroll department exactly how many allowances you are claiming for your situation. By answering these questions as correctly as possible, you will get just a little bit too much withholding. Getting a refund of $1,500 to $2,000 shows that in the past, you could have claimed additional allowances. The objective is to get as close as possible to a zero refund, even paying a little bit. That way, you are getting the full use of your money, instead of loaning it to the government interest-free.
The key in your situation is that married tax tables usually result in lower withholding. Both of you likely need to move to the “Married” filing status. However, it is important to remember that there is a total number of allowances to which your family is entitled. These allowances must be split between the two of you. For every $3,650 of non-taxable income, you are entitled to one allowance. If you claim the standard deduction ($11,400 in 2009), meaning you don’t have enough mortgage interest, state tax or charitable deductions (for example) to itemize, your situation provides for a maximum of 3 allowances plus one for each of you. That means a total of 5 to split on your W-4s. I usually reccommend that the spouse with the higher paying job claims the allowances. The lower paying job claims zero.
There are some handy free calculators available at PaycheckCity.com that can help you plan. The Form W-4 Assistant helps you complete a Form W-4 and the Salary Paycheck Calculator helps you see what your paycheck(s) will look like when you change allowances. For specific help on your situation, contact a CPA or tax advisor in your area. They will be able to take into consideration all of the aspects of your financial situation to help you plan on paying the lowest legal amount of taxes.
OCTOBER 29TH, 2008
By CPA SAM
Q. My paycheck is wildly different each time because I am paid commission in the 2nd check and a draw on the first check of the month. I submit a new W-4 each period to keep my withholding down. Now my payroll department doesn’t want to accept more than 1 change each month. Is this legal?
A. Probably without knowing it, your question is very similar to the following scenario: I only want to Read more »
AUGUST 27TH, 2008
By CPA SAM
Q. Why does my company withhold both New Jersey and New York taxes from my paycheck. I used to work in New York but don’t any longer. I now work in New Jersey only. I have always lived in NJ. What forms to I use to make sure that NY taxes are not withheld from my earning?
A. There is a link on the side of my blog under the “Forms” heading for State W4 Forms. That page contains Read more »
AUGUST 20TH, 2008
By CPA SAM
Q. I would like to ask how I can decrease the withholdings from each paycheck…I am married, salaried about 52K yearly; HR explained to me that I needed to increase the number of dependents (?!) I bought a house, I will therefore deduct the mortgage interest and the taxes. I live in Florida. Thanks for your help!
A. I get so many W-4 questions that it’s almost impossible to know where to start. Your HR department Read more »
JULY 16TH, 2008
By CPA SAM
Q. My employer says I have to complete a new W-4 every year. Is this true? How often do I have to do this? It’s always the same.
A. I’m amazed at how many questions come in regarding the Form W-4. This deceivingly simple Read more »
MAY 28TH, 2008
By CPA SAM
Q. My paycheck is never the same because I’m in sales. I’m always adjusting my W-4 to get the withholding right. Now my payroll department is telling me I have to wait a month before my changes are input. Is this legal?
A. As I say all the time in this blog, the W-4 is the employee’s best tax planning tool. If you get the right amount of withholding set, you will have neither a large refund or a large extra payment when you file your taxes. Unfortunately, that is the ideal situation that most people never see.
Per IRS Publication 15, “If an employee gives you a Form W-4 that Read more »
MAY 16TH, 2008
By CPA SAM
Q. I had way too much withholding last year and got a huge refund when filing my tax return. How do I change that?
A. This blog is coming from the floor of the Exhibit Hall at the American Payroll Association 2008 Congress in Austin, TX. With almost 2000 payroll folks surrounding me, I get to see the other side of your question as well. Payroll folks sometimes can’t understand why the regular employees don’t Read more »
