Reduce the Year-End Headache of Having Too Much or Too Little Withholding
As personal situations change, most likely so does a client’s W-4, making it even more important to review every possible exemption scenario.
As the close of the year approaches, tax clients often find themselves in one of two positions. They either have too many taxes taken out of their paychecks throughout the year, leaving them wishing they had some extra cash around the holidays, or they have too little taken out, resulting in concern about additional tax dollars they’ll owe. One way practitioners can alleviate their clients’ year-end pain and confusion is by using the Form W-4 (Employee’s Withholding Allowance Certificate) as a tax planning tool.
Clients may not think about their W-4 withholding choices on a regular basis and often forget to update their W-4 when a tax-relevant event occurs. Sound, informed advice on optimizing exemptions, planning for additional withholding when necessary, and estimating the impact of life changes, such as the birth of a child is more than welcome.
To cite an example of the importance of tax withholdings, let’s review a typical scenario. After receiving a mid-year notice from the IRS, John and his wife Mary met with a new tax consultant. While reviewing their current situation, two children and filing jointly, the tax practitioner discovered that John had previously filed a very standard W-4 in keeping with his situation – three exemptions and no additional income deducted from his paycheck. His wife Mary, on the other hand, had been self-employed for part of the year and had not filed estimated taxes. Her previous practitioner had advised against filing estimated taxes, since taxes were already coming out of John’s check. When the new tax practitioner estimated the taxes that would be owed at year-end, he found that John and Mary were significantly under paying. He helped them calculate how John could modify his W-4 exemptions in order to minimize what they would owe at the end of the year, thereby preventing payment of a considerable fine.
As a second example, between car repairs and holiday bills, Liz found that she was strapped for cash. Even though she paid them off each month, her credit cards were starting to mount. Her tax planner worked diligently to uncover ways she could secure additional cash. When he looked closely at what taxes she had paid year-to-date, he found that she was overpaying and had already satisfied her taxes for the year. She was able to immediately adjust her W-4 withholdings with her employer to 6 exemptions, and take home the rest of the would-be taxes in her paycheck, providing the additional cash she needed.
As a practitioner, you understand the importance of the W-4. To make it easier to calculate, Income Tax Planner™ software, from Bloomberg Tax has a W-4 Worksheet feature that takes the existing client data from the planner and pre-populates the W-4 form, saving you the manual effort of gathering, inputting, and performing calculations on the information. You can then make the appropriate scenario changes, compare the results, and once satisfied, generate a new W-4 form that can be printed and filed with the client’s employer, saving time and ensuring accuracy.
While the IRS and other websites have simple calculators designed for consumer use, the W-4 Worksheet feature in Income Tax Planner is a robust planning tool designed for tax and accounting professionals. It lets you consider both passive and active income, farm subsidies, and other more complex scenarios likely to arise with high-net-worth individuals. It is a strategy tool based on Bloomberg Tax’s renowned tax and accounting expertise, with built-in guidance and automatic calculations that can be used throughout the year to streamline client tax planning.
Learn more about how Income Tax Planner™ can help you determine just the right withholding to minimize taxes, avoid penalties, and optimize cash flow for your clients.