Check Out Your Withholding, It Might Be Time for a Change

Before it gets much closer to the end of the year, anybody who works--and pays taxes--can benefit from a withholding checkup.

The idea of a checkup is simply to sit down with your latest pay stub, a calculator and last year’s tax return, and spend a few minutes figuring whether you need to change your withholding rate for the last several paychecks of the year.

The reward for your effort can be substantial, especially if it saves you from penalties and interest that can be imposed if you fail to meet minimum annual requirements for withholding and estimated tax payments.

Many people think they can’t change the amount of money that their employers take out for taxes in the middle of the year, but it’s generally a simple matter of paperwork.

The rules say you must pay 90% of your total federal income tax bill for the year via withholding and/or quarterly estimated taxes.

Alternatively, you can satisfy the minimum requirement if you make withholding and estimated payments that add up to at least 100% of last year’s tax (110% if your taxable income exceeds $150,000).

If you make quarterly estimated payments, which are due on April 15, June 15, Sept. 15 and Jan. 15, they must each account for at least 25% of the minimum total you need to pay for the year. So if you are running short of your minimum for 1996, you can’t put yourself in the clear by simply jacking up the amount of the last estimated payment.

But you may be able to catch up in time by stepping up your withholding payments from your employer.

The Research Institute of America, a New York-based publisher of tax information, notes that all withholding paid during the year is considered to have been made in equal installments through the year.

“Thus, if an employee asks his employer to withhold additional amounts for the rest of the year, the penalty can be retroactively eliminated,” The institute says in a new booklet on year-end tax-saving strategies.”

For many taxpayers, underwithholding isn’t the problem. The great majority of people wind up with refunds due them because they make bigger-than-necessary withholding payments, which means they effectively give the government interest-free use of some of their money for a period of several weeks to more than a year.

If your October calculations show that you are in this position, you can consider fattening your cash flow in time for the holiday season by reducing your withholding from now to year-end.

Before you do that, though, make sure of your math, and don’t overlook any year-end bonuses that might be coming to you or other special factors that might scramble the numbers between now and Dec. 31.

Even if you conclude that you should neither increase nor decrease your withholding, the exercise of figuring out where you stand can be a useful starting point for any other year-end tax planning you want to pursue.

For instance, you may be able to chip away at the total tax you will ultimately owe for the year by selling a losing investment or increasing deductible outlays such as charitable contributions by year-end. Perhaps a property tax payment that’s due in January can be made in December.

Or you can try to defer income, such as a year-end bonus, until after Jan. 1 to keep the size of your overall 1996 tax bill down. The smaller the final amount of tax due, the better the chances that the withholding you are paying now will cover it.