When you file your tax return each year, the amount of tax
withheld from your paycheck or submitted through estimated
quarterly tax payments ideally should match the amount of tax you
owe. In reality, that seldom happens.
12 Year-End Tax Moves to Make Now
Most Americans are addicted to tax refunds. The average refund
is about $3,000 -- that's $250 per month. More than 75% of U.S.
taxpayers give Uncle Sam an interest-free loan year after year.
Doesn't it make more sense to get your money when you earn it
rather than waiting a year for a refund? Many of the remaining
taxpayers end up owing money, and some have to fork over an extra
10% penalty for having too little tax withheld throughout the
Both situations are easy to remedy, but the faster you act, the
better. Just file a revised Form W-4 with your employer. The more
"allowances" you claim on the W-4, the less tax will be withheld;
the fewer you claim, the more tax will be withheld. You can also
ask your employer to withhold a flat amount from your paycheck.
If you regularly get a refund, you've already banked most of it;
you'll still get a refund next spring. But you can stop the leakage
from your last few paychecks of the year by adjusting your W-4 now.
Worksheets that come with the W-4 can help you figure out the
proper adjustment; you could also struggle through the IRS's
online withholding calculator
But we've got a better idea. If your current financial situation
is similar to last year's, just use our
Answer three simple questions (you'll find the answers on your
2011 tax return) and we'll estimate how many additional allowances
you deserve -- and even show you how much your take-home pay will
rise starting next payday, if you claim the allowances on a new
W-4. (However, this shortcut won't be much help if your tax
situation has changed since last year because, for example, you got
married, have a new baby or switched jobs.)In that case, you might
want to give the IRS withholding calculator a whirl.
Alternatively, if you expect that you'll owe money when you file
your 2012 tax return next spring, you can avoid an underpayment
penalty by boosting your withholding now. You needn't pay every
penny of the tax you expect to owe. As long as you prepay 90% of
this year's tax bill, you're off the hook for the penalty. Or you
can escape its reach, in most cases, by prepaying 100% of last
year's tax liability. However, note that if your 2011 adjusted
gross income topped $150,000, you'll have to prepay 110% of last
year's tax liability to avoid a penalty. Taking these steps to
boost your withholding at year-end will shield you from an
underpayment penalty on your 2012 return no matter how much you
actually owe when you file your return.
If you have both wage and consulting income and expect to owe
money on your tax return, you'll do better by boosting the taxes
withheld from your last few paychecks rather than trying to make up
the shortfall with your final estimated quarterly payment due
Taxes that are withheld are treated as if they were spread out
evenly throughout the year, so that approach sidesteps an
underpayment penalty; the estimated-tax-payment approach does