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Tax Tip - November 17th,  2008

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Estimate your tax liability

Estimating your tax liability is a balancing act. Pay in too little, and you may face penalties or have to come up with a lump sum in April. Overpay and you crimp your cash flow and miss the opportunity to funnel your money to investments, college savings, or retirement savings throughout the year.

If the amount you've paid in so far during 2008 is out of balance with the tax you expect your tax return to show, here are two suggestions.

  • Adjust your withholding. Form W-4, "Employee's Withholding Allowance Certificate," tells your employer how to calculate the amount of federal income tax to withhold from your wages. If you receive pension income, Form W-4P, "Withholding Certificate for Pension or Annuity Payments," serves the same purpose. For withholding from social security benefits or unemployment, use Form W-4V, "Voluntary Withholding Request."

    You can fill out a new form any time to increase or reduce withholding.
  • Revise your final estimated payment. The last installment payment for 2008 is due January 15, 2009. You can change the amount you send in with Form 1040-ES, "Estimated Tax Payments for Individuals." Just remember, as a general rule, to avoid penalties you want to pay in either 90% of your 2008 estimated tax liability or 100% of the tax shown on your 2007 return.

Keeping an eye on how the amount you've paid in stacks up against your liability is sound money management. Give us a call. We're happy to help you stay in balance.

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