However, before you file away your 2006 tax returns you should make one last review to see what you can learn from them to help make 2007 less taxing.
(1) Did you owe your uncles a bundle? You should change your withholding at work to have more tax withheld.
(2) Did you get back a bundle? You should file a new Form W-4 with your employer to have less tax withheld.
I realize that many taxpayers, including some of my clients, use excess income tax withholding as a sort of “forced savings”. They look forward to a huge refund each year to fund their family vacation or some other such activity or project. When banks were paying pitiful interest this wasn’t so bad. However, with online money market accounts paying 4.5% to more than 5% on liquid savings you are losing money by making an interest-free loan to your uncles.
I used to suggest that, if possible, you should reduce your withholding and have an amount equal to the increase in take-home pay automatically withheld from their paycheck for deposit into a credit union savings account. This way you wouldn’t see the additional money and therefore wouldn’t have a chance to spend it foolishly.
Now I recommend you schedule an automatic withdrawal from your checking account in the amount of the increase for transfer to a high-interest online savings account at INGDirect, EmigrantDirect, AmboyDirect, etc. on the day after payday.
Of course you must have the self-control not to touch this savings account during the year.
(3) Was getting your tax “stuff” together a real PITA this year? Set up a filing system for tax records so that you will have everything in order next February.
(4) Did your dependent son or daughter have to file federal and state returns to get a full refund of the income tax withheld from an after-school or summer job, possibly at a cost that was more than the amount of their refunds?
Before starting a job a student is given a Form W-4 to fill out. Line 7 of the W-4 allows an employee to claim exemption from federal and state income tax withholding, if he/she had no income tax liability for 2006 and does not anticipate earning enough to pay income tax for 2007, by writing the word “EXEMPT” in the box indicated.
Writing “EXEMPT” on the form means that the employer will withhold only FICA (Social Security and Medicare) and any required state unemployment and/or disability taxes from the student’s wages.
For 2007, the federal standard deduction for a dependent with a W-2 is the amount of earned income (i.e. wages) plus $300.00, not to exceed $5,350.00. The state amount varies, and may be more of less than $5,350.00. For NJ it is $10,000.00.
If your son or daughter will not earn more than $5,350.00 in 2007 from a part-time job, including up to $300.00 in interest, dividends and capital gains, he/she should claim “EXEMPT” on his/her Form W-4. This way there will be no need to file a 2007 federal income tax return simply to get a refund of the income tax withheld.