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Tuesday, August 26, 2014

How to Fill Out a W-4 Form

Article by Cameron Huddleston

I remember when I got my first job and was handed a W-4. I had no idea what it was or how to go about filling out the IRS form. For starters, the whole "allowance" thing threw me off. As far as I was concerned, an allowance was something my parents gave me for doing chores when I was a kid.

I'm sure plenty of people just entering the workforce, and even quite a few experienced workers, have the same thoughts as they fill out a W-4 form. So let's go over the basics:

Why do I need to fill out a W-4?

The information you provide on the form is used by your boss to figure out how much federal income tax to withhold from your paycheck.

How do I know if I'm exempt from withholding?

You can take a pass on federal withholding if you owed no tax last year and expect to owe nothing this year, either. (This means zero tax liability for the year, not whether you owe tax or get a refund when you file.) Also, keep in mind this does not make you exempt from social security and Medicare withholdings! 

If you are exempt, simply fill out lines 1, 2, 3, 4 and 7 of your W-4 and return the signed form to your employer. Don't neglect to do this. Without a W-4 on file, an employer is required to withhold at the highest rate—as if you are single and claim zero allowances.  Also, be aware that any W-4 completed as “exempt” is only valid for that calendar year.  You will need to fill out a new one the following year, whether or not you still expect zero liability. 

How do allowances work?

The number of allowances you claim controls how much will be withheld from your paycheck. The more allowances you claim, the less money is withheld; the fewer allowances you claim, the more of your salary is sent off to the IRS. Form W-4 includes three worksheets to help you determine the correct number of allowances.

Which worksheet should I use to calculate my allowances?

Start with the basic Personal Allowances Worksheet.  For an unmarried worker with only one job, no dependents and who will claim the standard deduction, the worksheet is straightforward. Claim one allowance for yourself and a second because you’re single with only one job. Then enter “2” as the total number of allowances that you’re claiming on line 5 of your W-4. That’s it. You’re done. But if you’re married, have more than one job, will itemize or claim tax credits, things are more complicated. That’s not a bad thing. The point is to try to match your withholding to the tax bill you’ll actually owe next spring.

The two other worksheets that come with the form are designed to help you do that. Use the Deductions and Adjustments Worksheet if you expect to itemize your deductions or claim certain credits or income adjustments. Since those tax breaks will reduce your ultimate tax bill, you can use extra allowances to reduce withholding during the year. The Two-Earners/Multiple Jobs Worksheet comes into play if you and your spouse both work, or if you are single with more than one job. Those situations can affect your tax bill, too, and this worksheet will help you keep withholding in line.

If you want to get further into the weeds and refine withholding even more, you can grab a copy of IRS Publication 919, How Do I Adjust My Withholding? It has several more worksheets to run through. For the vast majority of taxpayers, though, that’s probably unnecessary.

Any special tips for married couples?

Here’s a key for married couples if both spouses work and a joint return is filed: Fill out a single set of the W-4 worksheets together to determine the total number of allowances you deserve; then divide allowances between the two of you on individual W-4 forms for your employers. If you double-dip on deductions or credits you could wind up being seriously under-withheld and owe a bundle to the IRS when you file your joint return.

How about tips for new grads starting a first job in the middle of the year?

There is a special brand of withholding that’s tailor-made for new college graduates who get their first full-time job around midyear. The part-year method sets withholding according to what you’ll actually earn during the part of the year you work, rather than on 12 times your monthly salary. That can make a significant difference in how much your employer holds back from your checks. The part-year method can be used by anyone who expects to work no more than 245 days—approximately eight months—during the year. It could also pay off handsomely, for example, if you land a high-paying summer job. You must give your employer a written request that the part-year method be used. Employers don’t have to comply, but if yours does, you’ll get more of your pay as you earn it.

Why can't I just make up a number?

The worksheets may seem complicated but while you are permitted to claim fewer allowances than you're entitled to (and many people do in order to ensure a bigger refund at tax time), you can be penalized for claiming more allowances than you're entitled to on your W-4.

Once I fill out a W-4 I never have to think about it again, right?

Wrong. First of all, you must fill out a new W-4 each time you start a new job. But even if you don’t switch jobs, you should revisit your W-4 whenever there’s a change in your personal circumstances. A marriage, divorce or birth of a child can have a big impact on how much tax you could and should have withheld. Submit the new W-4 at any time of year to your employer, not to the IRS. The revisions should take effect with your next paycheck.


Filing out a W-4 is a process specific to each individual and their tax situation.  If you want help determining your expected tax liability and the appropriate allowances, come visit your tax preparer at Gardner & Billing CPAs for a personalized look at your financial situation. 

Wednesday, August 20, 2014

How State Sales Taxes Work

Forty-five U.S. states and the District of Columbia rely on levying sales taxes on most things residents and visitors buy to help keep the state government functioning. In those states, sales taxes are an important source of income. The revenue from sales taxes is an essential part of the state's general budget. It goes into the pot with revenues from other sources and helps keep the public schools, universities, courts, highway departments, state police, medical programs and all sorts of other institutions and activities running. Without sales taxes, those states would find it difficult -- if not impossible -- to stay in business.

A sales tax is classified as a consumption tax. An income tax goes after the money you earn; a consumption tax targets only the money you spend. Some economists argue that state sales taxes aren't true consumption taxes. That's because most states have lots of exemptions -- sales of some goods and most services aren't taxed. Also, businesses often have to pay the sales tax on things they buy, although the businesses aren't the final consumers. Many foreign countries use a different sort of consumption tax -- known as a Value Added Tax (VAT) -- that gives a tax credit to businesses when the goods reach the consumer.  Regardless of what you call it, sales tax is usually tacked onto the price of an item. The consumer pays the tax to the retailer, who's responsible for keeping records and sending the revenue to the state at regular intervals. 

Consumers in most states don't care about the fine distinctions. A sales tax feels like a consumption tax to them. How much does it hurt?
First, there are the sales-tax-free states:
* Alaska does allow local governments to levy sales taxes, and many do.
* Delaware does impose a tax on businesses' receipts, at a lower rate (a maximum of 2.07 percent) than sales taxes in other states.  
*New Hampshire imposes excise taxes on hotel rooms, some restaurant meals and communications services. For practical purposes, these excise taxes work like sales taxes.
* Montana levies a 4 percent tax on rental vehicles.
* Oregon imposes small taxes on cigarettes and gasoline.

Then, there are the other 45 states. Some, such as New Mexico, don't call it a state sales tax on buyers, but rather a gross receipts tax of 5 percent on businesses, but since businesses routinely pass the tax on to consumers, it works the same way.

The state determines what you pay. California leads the nation with a state sales tax of 8.75 percent. On its heels are Indiana, Mississippi, New Jersey, Rhode Island and Tennessee at 7 percent. Next highest are Minnesota at 6.875 percent, Nevada at 6.85 percent, Washington at 6.5 percent, and Texas and Illinois at 6.25 percent.  On the low end is Colorado, with a 2.9 percent state sales tax. Next are seven states with 4 percent sales taxes: Alabama, Georgia, Hawaii, Louisiana, New York, South Dakota and Wyoming. 

Tax Holidays

In the 1990s, a few states came up with an idea that would spread like wildfire. They would suspend the collection of state sales tax on certain items for a weekend in August to give parents a break on back-to-school purchases like backpacks, supplies and clothes for their children. It was a win-win situation for many retailers and shoppers. The retailers came out ahead because the tax break encouraged a lot of shopping, and the parents saved money.  In 2010, at least 15 states had sales tax holidays scheduled. They ranged from one day to one week.

Sales tax holidays usually are targeted toward certain items. They often have upper limits on the price of items that can be bought tax-free. Back-to-school sales tax holidays are popular, but they aren't the only kind. Several states have started tax holiday weekends for appliances with the federal Energy Star efficiency rating.

Some sales tax holidays appear to be designed to influence behavior as well as to save shoppers' money. Louisiana and Virginia, for example, have tax holiday weekends for hurricane preparedness items. Louisiana also has a tax-free weekend for the sale of ammunition, hunting supplies and guns in honor of the Second Amendment.

In Vermont, the Legislature approved two one-day sales tax holidays in 2009, during which people can buy anything costing $2,000 or less tax-free. When shoppers turned out in droves on one of those holidays, March 6, 2010, retailers said it gave them a needed boost in a down economy. One speculated that the sales tax holidays encourage shoppers to buy locally rather than online. Buying online can be an easy way to avoid state sales tax. (Consumers are technically required to pay any sales taxes directly to the state -- even when the online store doesn't collect it -- but this rule is rarely enforced.) When tax isn't an issue, buying locally becomes more attractive because it's quicker and there are no shipping costs.

There's a catch, though: Sales tax holidays can be a victory for retailers and shoppers. But they're not great deals for the states that are losing the tax revenue. Some states have repealed tax holidays when the economy worsened. Others require that legislators authorize the holiday every year or two, and in some states such as Florida and Massachusetts, they've decided not to. New York, which was one of the first states to have a tax holiday, did away with the holiday in favor of removing state sales tax on clothing and shoes costing $110 or less year-round. 

The Down Side of Sales Taxes

Many observers say that Americans accept sales tax more willingly than they do other taxes. We pay it in small amounts, we're used to it and there's no paperwork for the consumer.  The main criticism of sales taxes has to do with fairness and social justice. Sales taxes are regressive, meaning that they hit the poor harder than the rich. Poor people have to spend a larger percentage of their income just to get by. Richer people can save more of their income or use it in other ways that don't involve paying sales tax.

But that's not the only rap on sales taxes:
* Too many exemptions: With the exception of Hawaii, most states with sales taxes exempt a number of items. Some of these exemptions lessen the tax burden on the poor. Food is often exempt, as are prescription medications. But other exemptions are more politically motivated and draw criticism.
* Too complicated:  Exemptions are one reason sales taxes are complicated and sometimes confusing for retailers. Another is the fact that various states have different rates, rules and ways of collecting from retailers. This maze of tax laws can be a nightmare for retailers doing business in more than one state.
*Double taxation: Businesses usually are treated as consumers and charged sales tax on office supplies and other items they use that don't go directly into the products or services they sell. This expense raises the price they charge on their goods or services, on which consumers pay sales tax.
* Can't keep up with the times: The economy has changed faster than sales taxes have. Services are a much bigger part of the American economy today than they were in the 1930s. States are beginning to tax some services like telephone and cable and satellite TV, but they encounter a lot of resistance.
* Lack of online taxes: The Internet has affected sales taxes in at least two important ways. Online shopping makes it easier for consumers to buy goods in other states and avoid sales taxes on most purchases. And downloading music, movies, books, games and software allows people to buy things they want without paying state sales tax.  

Sales taxes aren't the perfect way for states to raise revenue. And if states are going to continue to rely heavily on sales taxes, they'll have to figure out how to deal with changing times. But shoppers should know that state sales taxes won't disappear anytime soon.

Wednesday, August 13, 2014

Now is the Time for a Mid-Year Premium Tax Credit Checkup

If you applied for a health insurance tax credit through the Health Insurance Marketplace, it might be time to give your status a check-up.  Maybe you’ve experienced some life changes that will affect your credit….

Changes in circumstances that you should report to the Marketplace include, but are not limited to:
  • an increase or decrease in your income
  • marriage or divorce
  • the birth or adoption of a child
  • starting a job with health insurance
  • gaining or losing your eligibility for other health care coverage
  • changing your residence

Reporting the changes will help you avoid getting too much or too little advance payment of the premium tax credit. Getting too much means you may owe additional money or get a smaller refund when you file your taxes. Getting too little could mean missing out on premium assistance to reduce your monthly premiums.  

Repayments of excess premium assistance may be limited to an amount between $400 and $2,500 depending on your income and filing status.  However, if advance payment of the premium tax credit was made but your income for the year turns out to be too high to receive the premium tax credit, you will have to repay all of the payments that were made on your behalf, with no limitation.  Therefore, it is important that you report changes in circumstances that may have occurred since you signed up for your plan.  

Changes in circumstances also may qualify you for a special enrollment period to change or get insurance through the Marketplace.  In most cases, if you qualify for the special enrollment period, you will have sixty days to enroll following the change in circumstances.  You can find information about special enrollment at  

Find out more about the premium tax credit and other tax-related provisions of the health care law at or stop by and visit your tax professional.