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There are many ways to maximize your refund in any given tax year. However, as opposed to sifting through reams of tax laws to determine whether or not you qualify for certain tax credits, various deductions or if you should file additional tax schedules, one of the easiest & most frequently overlooked adjustments you can make is to your employee withholding.
Your employee withholding is the amount of taxes your employer withholds from your paycheck for tax purposes. In the absence of credits/deductions, the majority of a taxpayer’s refund comes from an overpayment of this withholding. Hence the term “Tax Return”. Asking your employer to slightly increase your weekly withholding, can make a significant difference in your future tax returns.
This is especially important now because the IRS has made changes to their federal with holding tax tables. The new Working Pay Credit aims to off-set the decrease in tax withholdings. However, not all employees will qualify for this credit, which means that those who are normally accustomed to a refund, can wind up OWING taxes.
Most wage earners will benefit from larger paychecks in 2009 and 2010 as a result of the changes made to the federal income tax withholding tables to implement the Making Work Pay tax credit. However, some people may find that the changes built into the withholding tables result in less tax being withheld than they prefer.
If you’re not eligible for the Making Work Pay tax credit, withholding changes could mean a smaller refund next spring. A limited number of people, including those who usually receive very small refunds, could in some situations owe a small amount rather than receiving a refund. Those who should pay particular attention to their withholding include:
Married couples with two incomes
Individuals with multiple jobs
Some Social Security recipients who work
Workers without valid Social Security numbers
The Making Work Pay tax credit, normally a maximum of $400 for working individuals and $800 for working married couples, is reduced by the amount of any Economic Recovery Payment ($250 per eligible recipient of Social Security, Supplemental Security Income, Railroad Retirement or Veteran’s benefits) or Special Credit for Certain Government Retirees ($250 per eligible federal or state retiree) that you receive. If you are affected by this reduction, you should review your withholding to ensure that sufficient funds have been withheld to meet your tax obligation.
Click HERE for more information on who qualifies for the Making Work Pay tax credit, withholding information for employees & employers, as well as special penalty relief for taxpayers.
This all boils down to the personal preference of the taxpayer. If you are accustomed to a refund and do not qualify for this new credit, or simply wish to have a bigger refund come tax time, then it is a very good idea to increase your withholding. If you require those additional fund to make end meet weekly, then you must do what in necessary. However, this may mean smaller refunds than you are accustomed to and even the possibility you will owe taxes.