With the year winding down, you may want to take a few minutes to make sure what is being withheld from your paycheck more closely matches your expected 2004 tax liability.
If you're having too much tax withheld, that's money you can't use until you get your refund. If you're not having enough withheld, you will owe tax at the end of the year, and you may even have to pay a penalty. Generally, a penalty will apply if your withholding and estimated tax payments total less than 90 percent of your current year’s tax liability and less than 100 percent of the previous year's tax.
But if you act now, you'll still have time to get on track with your withholding and avoid any unforeseen tax surprises next year. You should pay particular attention to your withholding if you received a big refund check this year or if you had to make a tax payment that was more than you could comfortably pay.
Also check your withholding if you had a significant change in your life this year, like marriage, divorce, birth or adoption of a child, purchase or sale of a home, or retirement. And there is a good chance you're not having enough withheld if you have more than one job, your spouse works, you have income not subject to withholding, such as rent, interest, dividends or capital gains, or you owe other taxes like self-employment or household employment taxes.
Adjust the amount withheld from your paycheck by giving your employer a new Form W-4. Or revise the estimated taxes you pay with Form 1040-ES.
Need help in figuring out whether you are withholding enough? Look at Publication 919, How Do I Adjust My Tax Withholding? Or you can check out our online Withholding Calculator. With the help of current pay stubs and a copy of last year’s tax form, you can see if you are withholding the right amount. You can then use the calculator results to fill out a new Form W-4.
So go ahead and get on track with your withholding. It makes good financial sense to bring the tax you pay closer to the tax you owe.
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