Friday, May 27, 2016


Now that your have filed your tax return, and paid your tax or received your refund, it is time to learn from your 2015 tax return.
The first thing you should do is evaluate your income tax withholding.

Let’s face it – everyone loves, and wants, a tax refund!

And as a tax preparer, very few things give me more pleasure, at least during the tax filing season, then telling a client, “Your Uncle Sam owes you tons of money this year!”  It is certainly better than starting off with “Oi vey!” or “Now don’t shoot the messenger”.

And if everyone loves a refund it follows that everyone hates paying their “uncles”.

However, from a strictly financial point of view, when it comes to taxes it is truly “better to give than to receive”. A tax refund means that you have made an interest-free loan to the federal, or state, government.

If you owe Sam, or your state, a balance due on your return that, by way of the various “safe harbor” rules, avoids a penalty assessment for “underpayment of estimated tax”, it is you who have received an interest-free loan from the government. You have had full use of your money during the year!

Quite a few of my clients receive rather substantial refunds on purpose, and have been doing so for years. It is a form or “forced savings”, like a vacation club. They plan to use the refund to pay for their annual family vacation, or to make needed home improvements, or pay for college, or pay off credit card debt.  I, and they, know full well that if they had an extra $100-$200 in their pockets each week they would spend it – and not necessarily wisely.

My suggestion is not to get the additional money in your take-home pay.  If you belong to a credit union at work have the additional amount of your pay directly deposited to your account. Credit unions often pay more than banks. Or you can increase your employee contribution to a pension or thrift savings plan. This way the extra $100 never finds its way into your hands.

Or you can have the additional money directly deposited to a ROTH, if you qualify, or traditional IRA account.  You can set up a ROTH myRA account and fund it with automatic payroll deductions.  To set up a myRA account go to

If you have accumulated excessive high-interest credit card debt using the extra $100-$200 per week to pay down this debt is, in many cases, like getting a double-digit return on your money.  But, just like with using home equity borrowing to pay down credit card debt, you must be sure that you do not turn around and build the credit card balances back up again.

If you received large federal and state refunds this tax filing season you should immediately change your withholding at work by filing a new Form W-4.  You may also be able to file a separate state W-4 form if you are only changing your state withholding. 

A federal withholding allowance represents your total tax deductions divided by the personal exemption amount ($4,050 for 2016).

Of course the reverse also applies.  If you owed too much to any of your “Uncles”, and were hit with a penalty for “underpayment of estimated tax”, you should increase your withholding.   

On the federal level you could be subject to a penalty for underpayment if you owe at least $1,000; it is often less on the state level (for New Jersey it is $400).  In order to avoid the penalty for underpayment of estimated tax for 2016 you must have either 90% of your final 2016 tax liability or 100% of your 2015 tax liability (110% if your 2015 AGI was over $150,000) paid in during the year by withholding and/or quarterly estimated tax payments.

The timing of the payment of tax is important in avoiding the penalty, which is calculated based on quarterly payments.  Increasing the tax withheld is better than making quarterly estimated payments.  Withholding is assumed to be made evenly throughout the year.  Estimated taxes are applied in the calculation when actually paid.  Even if you have all your federal income tax withheld in December it is treated as being paid in equally over the 4 quarters for purposes of calculating underpayment of estimated tax.  If you had $10,000 withheld in December it is assumed that $2,500 was paid in for each of the 4 quarters.  A $10,000 estimated tax payment made in December is treated as being paid in December, and you could be penalized for underpayment for the first 3 quarters

You can go to and use the free Salary Paycheck Calculator or Hourly Paycheck Calculator to review various withholding scenarios.

If you elect to make quarterly estimated tax payments you can use the federal EFTPS system to pre-schedule your payments to automatically come out of your bank account so you do not forget to make them on time. 

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