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Adjusting W-4 form can avoid excessive income tax refunds


Q. I read your article arguing that people shouldn't be glad to be getting a tax refund because it is really a lousy deal.

My husband and I have been getting a tax refund of about $6,000 for several years. We've used it for vacations before but recently to pay off debts (don't ask).

We are now thinking of having less money withheld from his paycheck. However, last year my sister decided to change her W-4 form at work to have less money withheld and, instead of getting her usual huge refund, the IRS decided they didn't take near enough from her and she ended up owing more than $2,000.

So, my husband and I are reconsidering. How do we avoid owing at the end of the year when we've always been used to such a large refund? It would be very nice to have the extra money in his check each month, but for two people who are lousy at saving, we would be in a lot of trouble if we ended up owing a lot of money.

A. I received an enthusiastic response to my column explaining that taxpayers are better off avoiding refunds. You get a refund only because you paid more than necessary throughout the year, usually through excessive tax withholding at work or higher-than-needed estimated tax payments.

As a result, you curtailed your monthly cash flow and perhaps went into debt as a result, the same debt you rush to pay off with your tax refund. Getting a $6,000 refund means you reduced your take-home pay by $500 each month without good reason. Depositing the same $500 at the end of each month in a savings account paying 3 percent interest would have yielded an additional $83 a year.

Usually, my mail runs about even on this topic, with half of you agreeing and the other half arguing that a refund is a form of "forced" savings (even if it is no-interest savings). This time most of you agreed that it makes no sense to pay your taxes ahead of time (you don't do it with the electric or phone bill, do you?). But you also seemed confused by the W-4 form taxpayers must fill out to adjust their withholding at work.

No wonder. The W-4 form, with its eight-step "personal allowance" worksheet, 10-step deductions and adjustment worksheet, and nine-step two-earner/two-job worksheet (the latter with two tables), is a testament to bureaucratic jargon and the mind-numbing complexity of our tax code. If you fill it out wrong, you might have too little money withheld from your paycheck, resulting not only in a large tax bill on April 15, but also in possible penalties for withholding too little.

To avoid this problem, I recommend that you don't fill out a new W-4 form without reading IRS Publication 919, "How Do I Adjust My Tax Withholding?," which is available for download at www.irs.gov or by calling the IRS at 800-829-3676.

Publication 919 gives useful tips on revising a W-4 form and includes seven worksheets, including one for projecting your total tax for the year.

Also quite useful are the instructions for IRS form 1040-ES, "Estimated Tax for Individuals," which is intended primarily for the self-employed or retirees who have no taxes withheld.

To make up for the lack of withholding, these taxpayers (I am one) must pay estimated taxes to the IRS four times a year, in amounts similar to what workers should have had withheld from their paychecks.

To help these taxpayers calculate how much to send in estimated payments, Form 1040-ES includes tax rate schedules and a fairly straightforward estimated tax worksheet that lets you project your tax liability for the year.

All taxpayers, including those who don't have to send estimated payments, can download or request a copy of Form 1040-ES and instructions from the IRS. Whichever form or publication you use, the key is to get a handle on your projected tax for the whole year.

Once you know that, adjusting the W-4 form is easier.

Say your tax for the year will be about $8,000, you have had $4,200 withheld and will collect 15 more paychecks before Dec. 31. Your goal is to have $3,800 deducted from those 15 paychecks, about $253.33 per check.

Humberto Cruz is a columnist for Tribune Media Services. E-mail him at yourmoney@tribune.com.

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