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Health & Fitness

April 15th Passed but It Isn't Over

Many people think that April 15th means that they don’t need to think about taxes again until February or March of next year. That can be a costly mistake.

Some of the taxes you’ll pay in April 2015 are the result of actions taken in the next few months.  This blog will cover employer withholdings. Other topics will be covered in future blogs.

If you are an employee (receive a W-2) and owed a great deal of taxes or received a large refund, you should consider adjusting your withholdings.  Your employer can provide a W-4, which is the form used to list your status (single or married) and your number of exemptions (children or other dependents that rely on you financially).  The form includes a method to calculate the right entries.  Your tax professional can also help.

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Married couples with both working should not necessarily mark married. Usually, the best plan is to mark “married treat as single” and take half the exemptions. That results in a combined withholding of married with all exemptions.  For each child 16 years old or younger (on Dec 31, 2014), take one more exemption unless your income including investments is over $110,000.

Let’s use a couple with two children (ages 14 and 17) at home to illustrate. Their total wages are $85,000 and they have $500 in bank interest, dividends, and capital gains.  With that income, they should receive the child tax credit for the 14-year-old child. Therefore, they should take 5 exemptions – 1 for each adult, 1 for each child, and 1 for the child tax credit received for the 14 year old. Each parent should mark “married, treat as single”. One parent should take 3 exemptions and the other parent should take 2 exemptions.  

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There are itemized deductions and other credits which reduce taxes owed.  People may have higher investment income, alimony, or other income that can increase taxes due. If you have a lot of these (>$2000), then determining your deductions is more difficult.

There is a “rule of thumb” for adjusting your tax withholding but you need to know your current withholdings (your employer should know this) and your marginal tax bracket (often provided with tax software or from your tax professional).  Multiply your tax bracket times $4000.  For each exemption added, you’ll reduce your withholdings by that amount. For each exemption removed, you’ll add that amount to your withholdings.

Returning to our couple. Let’s say they owe $1500 in taxes this year.  They are in the 15% tax bracket. 15% times $4000 is 0.15x4000=$600. They want to have a small refund next year. If they collectively remove 3 exemptions (let’s say 2 from his W-4 and 1 from hers), then they will have about $1500 ($600 x 3 = $1800) more withheld during the year.  In 2015, they will likely get a refund of about $300. That is, instead of owing $1500, they will have paid $1800 more during the year, leaving them a likely refund of $1800-$1500 = $300.  This assumes that there aren’t other major changes.  We’ll discuss those in future blogs.

Remember to adjust the state withholdings as well.

As with all tax advice, each individual situation is different and there are exceptions.  Tax information provided here is not intended to be used to avoid any federal or state penalties that may be imposed on the reader.

Beth Logan is an Enrolled Agent for Kozlog Tax Advisers in Chelmsford.  She can be reached at info@kozlog.com.

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