Tax Withholding: Should You Change Yours?

Many tax and financial experts are encouraging taxpayers to review their 2009 withholdings now, as it may be that, due to economic conditions, taxpayer’s income may be reduced due to layoffs or cutbacks on the job.

Essentially, this means, you could be having more tax taken out of your pay than you will be liable for at the end of the year.

The following circumstances should prompt any taxpayer to adjust his W-4 Form to lower both his federal and state withholding taxes:

1. A taxpayer or his spouse has been laid off in 2009. Usually, when both spouses are gainfully employed the taxpayers tend to increase their W-4 withholdings. The loss of the job for either of the spouses could be reason enough to reduce the federal and state tax withholding by claiming the maximum allowable exemptions.

2. Taxpayers whose spouse’s own and operate a business may have in the prior years increased their federal and state withholdings at their regular job to ensure they meet the income tax obligation from their spouse’s business profits. However, for the tax year 2009 the profits from their spouses business may have either been eliminated or substantially reduced. These taxpayers might find it prudent to file a new W-4 Form and drastically reduce their federal and state income tax withholdings to reflect the reduced tax liability from the spouses business.

3. Taxpayers who have recently had a baby or claiming elderly parents as dependents may also find that they are entitled to additional dependent allowances. Thus, they should consider filing a new W-4 Form to reflect the additional dependent allowances the taxpayers are entitled to claim on their tax returns.

4. Taxpayers who have sustained substantial capital losses in the stock market are entitled to deduct up to $3,000 of the capital loss against their salary and other ordinary income. These taxpayers may be entitled to claim an additional withholding allowance.

5. Taxpayers faced with reduced taxable income due to a salary reduction, the taxpayer might find themselves being placed in a lower tax bracket. Both these factors would entitle the taxpayers to reduce his federal and state income tax withholdings by claiming additional allowances.

A taxpayer’s previous strategy of overwithholding so as to plan for a tax refund may not be a smart idea for 2009 if you’re faced with an extremely difficult time meeting your current financial obligations. It’s better not to use credit cards or lines of credit to fund your current obligations and instead, increase your paycheck by maximizing your dependent allowances you are legally entitled to by the IRS.