Q. I have three kids and I’m married, and I always get a refund with our tax returns. I know we can adjust our withholding to change that, but how can we figure out exactly what to change?
A. Great question.
The best way to figure out what changes to make for your withholding is to have a tax projection for the current year run by your CPA, said Douglas Duerr, a certified financial planner and certified public accountant with Duerr Financial Group in Montville.
“They can look at your previous return and make assumptions based on what you believe your earnings and deductions will be for the current year,” Duerr said. “At that point they will be able to give you a better idea of what you can make your withholdings to ensure that not too much is withheld and not too little.”
The IRS web site also offers a tool to help. Its withholding calculator can help you see what changes, if any, you should make.
Before you use the tool, you’ll need to have some information handy, said Clare Wherley, a certified financial planner and certified public accountant with Lassus Wherley in New Providence.
Have a copy of your most recent pay stub and your prior year’s tax return, she said.
“If your pay stub doesn’t tell you how many allowances you are currently claiming for both federal and state, then contact your payroll department and see what they have on file,” Wherley said.
The calculator will ask how often you’re paid, and whether or not you itemize deductions or claim the standard deduction. Check your return for that, and for whether you claim a dependent care credit and/or the child tax credit.
Once you’ve gathered the necessary information, you can proceed to fill out the form or calculator referring to the instructions or questions provided.
Wherley said it can be a daunting task, but there are a few basic rules of thumb to consider:
For a one-income family, with little or no investment income and a standard deduction, claim one allowance for each family member.
If you itemize deductions you may be able to claim an additional allowance (or more).
If you have any significant investment income, such as interest, dividends or capital gains, you should probably claim fewer exemptions than the number of family members, Wherley said, noting that sometimes the investment income cancels out the itemized deductions.
“If both you and your spouse work, then your income will put you in a higher tax bracket so claim fewer allowances,” she said. “And if you claim credits or work multiple jobs, or your income varies substantially, then you really need to work with the calculator.”
Wherley said most importantly, remember that if you change withholding during the year the number of allowances may not be correct for a full year. It’s best to fill out the information and change allowances if needed so they are applied at the beginning of January.
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