The amount of taxes taken from your paycheck is determined by how you fill out a W-4 form, which shows your status (single or married) as well as the number of allowances taken. Plan wrong on your W-4, and you could either owe Uncle Sam or allow the government to use your money for free. Either way, it’s not the ideal.

The amount of taxes taken from your paycheck is determined by how you fill out a W-4 form, which shows your status (single or married) as well as the number of allowances taken. Plan wrong on your W-4, and you could either owe Uncle Sam or allow the government to use your money for free. Either way, it’s not the ideal.


From a financial planner’s point of view, the goal is to end up with no money owed or returned on taxes, says accredited tax adviser Mike Martin, president and founder of Mike Martin & Associates in Independence, Mo.


How to make it happen?


 


Take time with the form


Anyone hired for a job will fill out a W-4 form, but it can end up an afterthought during the whole hiring process. Elda DiRe, tax partner in the personal financial services group of Ernst & Young LLP in New York City, suggests taking home the W-4 form and its accompanying worksheet to thoroughly work it through. Look at what happened the year before — did you owe or get a large refund — and adjust allowances accordingly. The IRS also offers an online withholding calculator at www.irs.gov.


 


Change for life circumstances


Employees can adjust their withholding at any time throughout the year. This is especially important if there’s been a major life change, such as divorce, birth or death. “People get frustrated from life circumstances, and taxes are the last thing they think about, but they should,” Martin says. For example, if someone claiming married and three allowances gets divorced during the year, the resulting tax amount withheld at the end of the year might not be sufficient to cover the taxes due.


 


Seek out professional help


So many tax law changes happened in 2008, Martin says, that it’s not possible for individuals to stay on top of them all. For this reason, he recommends visiting a tax professional this year, if only for this year. A professional can incorporate a W-4 review into a tax session, if requested, that can aid in achieving that perfect balance at tax time.


 


Don’t forget to watch the law


With a new president in office, there is much talk about a permanent tax cut for the middle class. Martin says he wouldn’t be surprised to see legislation coming in February or March regarding that tax cut, making it a good time to re-evaluate your tax withholding to work in the new laws.


 


Unemployment counts, too


If you are receiving unemployment benefits, be aware that federal taxes are generally not being withheld from those benefits even though they are taxable, DiRe says.


It’s a difficult conundrum, Martin says, given the great need for cash when receiving unemployment. But having even a small amount withheld from unemployment benefits can help ward off receiving a shock at tax time.