IRS Form W-4 is the form you file with your employer the helps determine the amount to be withheld from your paycheck for taxes.  Ideally, your elections on the W-4 should put you in the position where you neither owe money to the IRS or receive money from the IRS at the end of the year.

The basics of theW-4 allow employees to show:

• Whether  you are married or single
• How many withholding allowances you should claim. The more allowances you claim, the less tax is withheld.
• Whether you want an additional amount withheld

Your W-4 should be reviewed annually and amended for any changes in life circumstances (new child, marriage, loss of spouse, etc.)

In 2011, each allowance you claim reduces your taxable income by $3,700. Please be sure to be careful, claiming allowances you are not entitled to (you can’t claim your dog – REMEMBER the IRS requires social security numbers for your children too) will cause the IRS to penalize you.

HELPFUL HINT: If you received a large refund last in previous years (remember this is just the IRS returning YOUR money back to you that was not earning interest), you should consider increasing the number of allowances you claim so less tax is withheld. If you paid the IRS a large sum when you filed your return, you should decrease the number of allowances you claim.

Working Couples and Withholding

Married spouses who both work: the W-4 has a special worksheet for you to determine the number of allowances you each should be taking.  It’s based on your income and the number of your dependents.  In essence you will figure the total allowances you’re both entitled to and divide those total allowances between you and your spouse..

After claiming the allowances for yourself and your dependents, you should add extra allowances if:

• You’re single and have only 1 job.
• You’re married, have only 1 job, and your spouse doesn’t work.
• Your wages from a second job or your spouse’s wages are $1,000 or less.
• You have at least $1,500 of child- or dependent-care expenses and will claim a tax credit for these costs.
• You’ll file your return as a head of household.
• You’ll claim child credits – which are worth $1,000 for each eligible child. The number of allowances you claim depends upon the number of eligible children and your income.

Other life changes that might determine your Form W-4 allowances include:

• Marriage or divorce
• Birth or adoption of a child
• Purchase of a new home
• Retirement
• New job or second job
• Increase in interest, dividend, or self-employment income
• Increase in your itemized deductions

Exemption From Withholding

There is a spot on the W-4 to write “Exempt”.  You are not eligible for “Exempt” Status and you must have withholding if any of these apply:

• Your income for 2010 is more than $950.
• Another person can claim you as a dependent on his or her return.
• You have more than $300 of unearned income. Unearned income includes interest on savings accounts, mutual fund dividends and other investment income.

If you can’t be claimed as a dependent, you can make much more and still be exempt from withholding.

If you owed no federal tax last year and expect to owe none in the current year, you might be exempt from withholding. For 2011, the minimum filing requirements are as follows:

Single $ 9,500

Married Filing Jointly $19,000

Married Filing Separately $ 3,700

Head of Household $12,200

Qualifying Widow(er) $15,300

If you are self-employed you must file if you earned $400 or more

Withholding and Retirement Income

You can choose to have federal income taxes withheld from your:

• Pension
• Annuity
• Traditional IRA withdrawals
• Social Security benefits

With other retirement plans, you might need to file a form with the payer to stop required withholding. If you don’t complete withholding forms for pension benefits, taxes will be withheld as though you were married and claiming 3 exemptions. So, taxes will only be withheld if your pension is at least $2,080) per month.

You should re-evaluate each year to see if you want to have taxes withheld. Use Form W-4P to have taxes withheld from your pension, annuities, and IRAs. Use Form W-4V:

Voluntary Withholding Request to have taxes withheld from Social Security. Choose 1 of these rates for Social-Security withholding:

• 7%
• 10%
• 15%
• 25%

See IRS Publication 505 to learn more.

Lump-Sum Pension Payout

If you receive a lump-sum payment from your retirement plan, you will be taxed 10% and your plan administrator will withhold this.

Rolling over the IRA or other pension is not recommended for the following reasons: the tax withholding requirement is 20%. This applies even if you retire, quit, or are laid off. If 20% is withheld, you’d be prepaying tax you might not owe – especially if you roll over the distribution within 60 days.

So, if you handle the rollover yourself by taking the check and depositing it in a rollover IRA within 60 days:

• Your plan administrator will withhold 20% of your distribution.
• Unless you include the amount equal to the 20% withholding from another source, you won’t have enough to put the full payment into an IRA.
• The IRS will tax and possibly penalize any part of the gross distribution that’s not rolled into an IRA within 60 days.

TAX FREE SOLUTION: To avoid having 20% withheld from your distribution, you should do a direct rollover. To do a direct rollover:

1. Tell your employer you want to roll the funds over directly to another plan or IRA.
2. Provide your employer with the information about the account that’s to receive the rollover funds.
3. Your employer will transfer the funds directly to the other account without withholding any taxes.

Tips and Withholding

All tips you receive are taxable income subject to withholding under the Internal Revenue Code. So if you receive $20 or more per month in tips, you should report that income to your employer.

Tip income you report will show up on Form W-2, box 7 (Social Security tips) and box 1 (Wages). This will be used by your tax preparer at the end of the year to determine your tax liability.

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