Tax Girl

The end of the year is coming up and I’m going to see if I’m withholding enough or too much from my paycheck. The IRS puts out a really good publication, Publication 919, that basically goes through the why, when, how’s of adjusting your withholding. Basically you don’t want to withhold too little or you’ll pay fines and penalties, but you don’t want to withhold too much because that money could be saved at a nice 4% savings rate. The publication also has these helpful worksheets that guide you through how to project your 2005 taxable income. Then you figure your tax liability and compare it to how much you will have withheld for the entire year.

Me:

Projected W-2: $47,716.45
Standard Deduction: $ (5,000.00)
Exemption Deduction: $ (3,200.00)
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Taxable Income: $39,516.45
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Tax Liability: $ 6,544
Tax Withheld(projected): $ 7,224
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Overwithheld $ 680

I have about the simplest tax return because I don’t itemize, I don’t have other income such as capital gains/losses, interest income, dividend income, etc., and I don’t qualify for any tax credits. So from this projection I can expect a refund of around $680.

Now let’s say I had withheld exactly my tax liability. If I pro-rate the $680(680/12=57) and use a 4% savings rate, I could’ve earned $17 of interest. I guess it’s not that much, but it’s something.

If you underwithhold you probably have another paycheck or two until the end of the year to withhold some more. You’ll have to fill out another Form W-4 and give it to your HR person.