Personal Finance Blog


Let’s Talk Taxes & Withholding

So, the magical tax day is approaching.  You’ve spent hours collecting paperwork, receipts, contracts and tax forms to calculate your tax burden.  The truth is likely out — do you owe money to the IRS, or do they owe you?   As a result of careful planning (let’s hope), and a little luck, they owe you.  Either way, tax time is a perfect time of year to review or calculate federal withholding.

It’s exciting stuff I know (are you getting the sarcasm here?), but think of it as just another chore to work through before the year gets too far along.  If you owe taxes on the other hand, you’re probably chomping at the bit to get to some withholding tables.  Before we get to the actual withholding calculator, let’s look at what’s new for taxes in 2010, straight from the horse’s mouth (found at http://www.irs.gov/pub/irs-pdf/p919.pdf):

  • Limit on deductible farming losses.
  • Roth IRAs.
  • IRA deduction expanded.
  • Domestic production activities income deduction.
  • Personal casualty and theft loss limit reduced.
  • Standard mileage rates. (Mostly reduced, so watch out!)
  • Personal exemption and itemized deduction phaseouts.
  • Alternative minimum tax (AMT) exemption amount decreased.
  • Certain credits not allowed against the AMT.
  • Qualified fuel cell motor vehicle credit reduced.
  • Earned income credit (EIC).
  • First-time homebuyer credit.

Each of these has been expanded or contracted in some way.  If you believe that they may be applicable to you, download the publication here.  Note as well, that many tax benefits not mentioned here are set to expire, so a review of those would definitely be in order.

Some last items to consider are lifestyle or financial changes that have, or will occur in 2010.  What kind of changes, you ask?  Well, if you get married or divorced, start or stop a job, file for bankruptcy or give considerably to charity, you’ll want to keep your claimed withholding in mind.

There are at least two ways to get tax withholding answers.  The first is the manual, paper and pencil way in Publication 919, How Do I Adjust My Tax Withholding?, as linked above.  You can  work through the instructions and fill out the accompanying worksheets to arrive at the final answer.  The more favored way, in my opinion, is the IRS withholding calculator located here.  This calculator is easier for a number of reasons, not the least of which is that the calculator asks you to answer questions.  The publication gets you to figure out the answers.  Another reason this tax withholding calculator is superior is that you can change your answers and investigate the “what-if” scenarios life tends to bring us.  Go to the calculator and play with it a while.  You’ll find you’ll bring your tax responsibility into focus and learn how to pay just the right amount for 2010.

(A disclaimer I shouldn’t have to print, but will anyway:  This blog represents my personal views, and should in no way be construed as tax advice.  Seek out your professional tax advisor should you require advice, or feel uncomfortable making decisions that could lead to tax consequences without the guidance of a tax professional.)

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