Duvall & Associates, Inc.
BUSINESS ADVISOR NEWSLETTER
 

Plan your tax payments

- by Alan Duvall 

Published in Dayton Daily News   December 17, 2006 

Here's a New Year’s resolution: Stop procrastinating and tax plan early.   

Where to start?  Counter-intuitively, perhaps the best place to begin is actually at the end – payment of tax liabilities. 

The vast majority of employees pay taxes by having employers directly withhold funds from wages.  The process begins at time of original employment with completion of a W-4 form.  Personal data and social security number is entered before tackling the Ho-Ho-Jolly section.   

Detailed instructions guide the worker through a series of worksheets to determine the number of “allowances” you intend to claim.  The more allowances, the fewer taxes withheld from wages.  Contrary to the disapproving grumbles of payroll Grinch administrators, you can change the number of allowances mid-year to accommodate a change of financial circumstances or strategy.  

Instruction-challenged workers may determine it easier to simply present payroll administrators a periodic dollar tax figure to plug into the allowance withholding equation.  Low income and students employees may even discover they can claim complete exemption from tax withholdings.   

Although many taxpayers prefer to over-withhold taxes to generate jackpot refunds at return filing time, it may actually be wiser to force tax payments at April 15.  The objective of this reverse strategy is to retain your cash, without penalty, as long as possible so that you, and not the IRS, earn interest on the money. 

For 2007, if you pay in enough taxes to match 100 percent of your 2006 taxes owed on income, you will avoid any under-payment penalties, even if you owe $1 million tax at return time (110 percent federal taxes minimum if 2006 adjusted gross income is more than $150,000). 

Wage withholdings are generally treated as paid evenly during the year.  So to stretch out payments, it is possible to withhold less taxes in early months and increase balancing amounts in later months (or from year-end bonuses). 

Alternatively, some taxpayers utilize quarterly estimate forms as a means of remitting taxes.  These payments must typically be uniform in amount to avoid penalties, unless the differential is justified by quarterly changes in income.  A final return overpayment can also be credited for payment of next year taxes if so desired. 

“There’s one for you, nineteen for me... Be thankful I don’t take it all... ’Cause I’m the tax-man.”  – Beatles 

Alan Duvall is a certified public accountant in Dayton.  Contact him at Alan@Duvallcpa.com.