Although an annual review of your form W-4 (Employee’s Withholding Allowance Certificate) or estimated tax payments is always important, it may be particularly imperative to do so in 2009.  The current economic recession and other changes to your personal and financial situation may have had, and will continue to have, a significant impact on your income. Moreover, recent changes in the tax law, including extensions of certain deductions and credits through 2009, make accurately estimating your tax and ensuring you are not overpaying in withholding all the more important. Changes in the latest stimulus tax package likely will require further adjustments to withholding and estimated tax for many taxpayers.

Adjusting your withholding

The average refund in 2008 was $2,429, according to the IRS. However, a big refund does not mean you have won the lottery. More likely, it means that you had too much income withheld from your paycheck or paid too much in estimated tax and a re-evaluation of your W-4 is in order. However, a change in your salary and wages is not the only factor to consider when adjusting your withholding. A change in your personal circumstances, such as the birth of a child, marriage, divorce, purchase or sale of a new home should also be considered since these events also impact your financial situation and income.

You will want to take a close look at your withholding for 2009. And, if, necessary amend your W-4 by changing your withholding allowances for 2009 for adjustments to income or other changed circumstances, such as a change in your number of dependents or marital status.

Estimated tax payments

You may have income in 2009 in addition to salary and wages that is not subject to withholding, such as dividends and interest, capital gains and losses, rental income, or self-employment income. Estimated tax is used to pay tax on income that is not subject to withholding or if not enough tax is being withheld from a person’s salary, pension or other income. Generally, individuals who do not pay at least 90 percent of their tax through withholding must estimate their income tax liability and make equal quarterly payments of the “required annual payment” liability during the year. For the 2009 tax year, estimated tax payments are due on April 15, June 15, September 15, and January 15 of 2010.

Except for any installment based upon the annualized income method, a required installment or estimated tax payment is 25 percent of the required annual payment. The required annual payment for this purpose is generally the lesser of:

  • 90 percent of the tax shown on the return for the tax year, or if no return is filed, 90 percent of the tax for the year; or
  • 100 percent of the tax shown on the return for the preceding tax year

Note. The required annual payment cannot be based on the preceding year’s tax if the preceding tax year was not 12 months long or if the individual did not file a return for that year, unless no return was filed because no tax was due

However, for high-income taxpayers whose adjusted gross income (AGI) shown on the preceding year’s tax return exceeds $150,000 ($75,000 for married individuals filing separately), the required annual payment is the lesser of 90 percent of the tax for the current year, or 110 percent of the tax shown on the return for the preceding tax year.

The rules surrounding estimated tax payments and withholding can get complicated. If you would like further information about changing your withholding or estimated tax payments, please contact our office.