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Plan Well, Retire Well

Saving and investing your money

Income Taxes: Using Withholding and Estimated Taxes to Plan for 2011

While you're pulling together the information to file your 2010 income taxes, give a thought to your 2011 taxes. You might need to adjust how much is being withheld from your paycheck. Or, you might need to make estimated tax payments. The goal is to ensure that you have paid enough taxes to avoid an underpayment penalty next year, but not to overpay so much that you build up a huge refund.

What are some signals that you might need to change your withholding or estimated tax payments?

  • You owe tax or get a large refund when you file your 2010 taxes.
  • You claimed dependents in 2010 that you will not be able to claim in 2011, or vice versa.
  • You had deductions or credits in 2010 that you won't have in 2011, or you will have new deductions or credits in 2011. There are many possible deductions and credits. Some of the most common- and reasons they could change - are:
    • Tuition Deduction or American Opportunity Credit for higher education expenses. Do you have a child starting college, or one who graduated last year? (See Tax Breaks for Higher Education for more information about these and other tax breaks for expenses related to college or other post-secondary education.)
    • Child credits and/or childcare credits. Will you have a child born or adopt a child in 2011? Will you lose credits for children who are now too old for you to claim?
    • Charitable contributions. Did you make a large contribution in 2010 that you won't repeat in 2011? Or, will your charitable contributions increase significantly this year?
    • Home mortgage interest and property tax deductions. If you are buying a home, selling a home and becoming renter, or losing a house through foreclosure, these deductions may change dramatically.
    • Contributions to traditional IRA accounts which may be subtracted on your 1040, or to employer retirement plans which reduce your W-2 reported income.
  • A change in your filing status, for example, from Head of Household to Single or from Qualifying Widow(er) to Single.
  • A change in the type or amount of income. Perhaps you were an employee, but are now starting your own business and will be writing off lots of start-up expenses. Or, you're recently retired and will be receiving Social Security benefits and distributions from retirement accounts instead of a paycheck. Perhaps you plan to sell some investments, generating capital gains.

To change the amount that is withheld from your paycheck, complete a new W-4 and give it to your employer. With many employers, you can do this online through your benefits office. Otherwise, you can complete a paper W-4 form and give it to your payroll or benefits office. You can change the amount of withholding by changing the number of personal allowances you claim or by specifying a certain additional dollar amount to withhold from each paycheck. Personal allowances are factors that indicate you will owe less tax, such as the number of dependents in your household or the number of children for whom you will claim the childcare credit. If you owed no tax in 2010 and expect to owe no tax in 2011, you can also use the W-4 to request that no taxes be withheld.

You can also have taxes withheld from Social Security benefit checks. Use Form W-4V.

Estimated tax payments are made four times per year (by the 15th of April, June, September, and January) when you expect to owe more tax than is being withheld. The instructions on Form 1040-ES can help you determine whether you are required to pay estimated taxes, and when you might owe a penalty for underpayment.

Thinking about income taxes may not be your favorite activity, but a little attention now could give you more spendable money during the year if you were withholding too much, or save you from a penalty later.

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