Avoid The April Aftershock!

Avoid the April Aftershock!

Get the W-4 right and cruise through taxes like a knife through butter

I always wondered where that saying came from. I mean…it makes sense…but really? Why a knife through butter? You know…if you keep your butter in the fridge, sometimes it’s a little harder than it should be to get that knife through there.

And two sentences in, you’re wondering where I’m going with that…I don’t blame you. You see, the “new, simpler” W-4 that came about several years ago now does nothing but create problems for people. In reality, it SHOULD be simpler to understand – to complete – to feel confident in, etc., but the methods by which we used to be able to effectively manipulate a W-4 for what I call “tax season success” (dialing in that refund/amount due to inside $1000) were completely turned on their ear, and we had to learn a new method of finding our way to that happy place.

And that’s just like that cold stick of butter…so let’s warm it up a bit…

The W-4: What it is and What it isn’t

Routinely people get on our calendar to express their anxiety about how they’re either seeing “way too much” or “nowhere near enough” federal tax withholdings on their paycheck. “But I completed my W-4 EXACTLY like it says.” I’d offer two things here…first, yep, you may have done just that…but did you read the fine print and do all the extra “work” in the pages and worksheets outlined in the W-4 instructions? If not, that COULD be your issue. Second – the W-4 is NOT a binding contract between you and the IRS. It is, for all intents and purposes, a TOOL for you to have an employer withhold the right amount from your periodic pay so that you stay “on track” with the tax bill you’ll reconcile (via the 1040 filing) in the following year. I say this for a simple reason, when we (the collective tax community out there) suggest a change to your W-4 that seems to conflict (i.e. perhaps we’re saying to complete the W-4 as a Single filer instead of Married-Filing-Jointly, or asking you to add an extra amount to a particular box), we’re “working the gears” to dial in that plus/minus $1000 result on next year’s Form 1040.

So what do you need to do?

I’ve created a video on the topic because it truly is a LOT to cover in a blog post – but the video will be linked to this post for your edification. I’ll summarize by listing the three options here, though:

1. For the DIY folks out there, do a simple internet search on “Form W-4” and one of the first
entries will take you to a PDF file on the IRS website where you can download and complete the
form into a fillable PDF (or, if you’re a pen-to-paper type person like me, print it old-school
style). Here’s the big caution…READ THE INSTRUCTIONS thoroughly! If you’ve got a side hustle,
it tells you how to accommodate for that. Got dividend/interest income? Yep – something more
to consider. Spouse work? Yep…another consideration. Child care costs? Yep…and the list goes
on. It’s like you’re presetting your expected tax return so it can dial a number in for you. And it’ll
make any DIY-er reconsider being a DIY-er.

2. For the DIY folks who don’t like option 1 OR for anyone just curious, our “friends” at the IRS
have a handy tool on their website. The current link is here but knowing how the world wide
web works, that address could change, so I’d recommend if the link doesn’t work, just search
the IRS website for “Tax Withholding Estimator”. Now…listen…this thing is imperfect, but it
allows you some leeway to try different scenarios fairly quickly. You’ll even have an opportunity
to plug in your year-to-date pay stub and get an idea of how things are going to fall out for
you. This can be an effective way to accomplish the aforementioned tax season success.

3. Don’t like either of those options or…just flat out want a “pro” to look it over? Consult a tax
advisor. If you use a tax preparer already, chances are they’ve got a W-4 estimator on their tax
software and can assist in guiding you. I find this an effective way to have an actual conversation with your accountant/preparer/advisor to look forward rather than backward. See…in this profession, tax preparers spend their days looking backward and reporting on what happened. Engage their intelligence to assist you IN THE PRESENT, or even…if you’re really lucky – IN THE FUTURE!

Follow-up Tips

These things certainly “melt the butter” a bit, but the knife isn’t sliding through just yet. A couple of things to keep in mind:

1. Obviously, going through all this effort and then NOT turning anything into your company with a revision doesn’t do you any good. If you’re making a change to the W-4, then you’ve you have to alert your payroll folks to make the change. Sometimes they’re going to ask you to plug it in on an online portal associated with your payroll system. That MIGHT not look/feel the same as the W-4 you just completed. If that’s the case, alert the folks within your company who can help – and see if they can help reconcile any differences between your newly revised form and their payroll app.

2. THEN WATCH! On subsequent payroll checks, watch your pay stubs (I know, nobody gets stubs anymore…so…go look at your “stub” online)! Is there a noticeable difference in your Federal Tax Withholding and did it match what you expected to see? If not, believe it or not, you can adjust it again!

3. Making a late-year change? Let’s say you’re doing all this work in late September and realize
you’ve got a LOT of ground to make up. You decide you’re willing to tighten the belt and try to
get it all done this year through additional withholdings of $500/payroll starting the first payroll
of October. With 6 payroll runs left in October through December, you’ll amass an extra $3000
going towards your taxes for this year – that’ll ensure you’ve dialed things in close. Next April
comes, you dialed it in perfectly – woohoo! BUT WAIT! You didn’t go back and change it when
the new year came around! Always, always, always…revisit that W-4 as close to the beginning
of the year as you can so that any late-year changes you made to “make up” for lost
time can be “corrected” for the new year.

Some final thoughts – tricks of the trade

Over the years, I’ve seen lots of folks using the US Treasury as their savings account – intentionally setting aside far too much simply so they can get a big refund. I don’t necessarily see it as much these days as I once did, but I do know they’re out there. The W-4 CAN be manipulated to do such a thing, but, for the life of me, I’d love to introduce you to a good financial planner, or even just a banker, who would be more than happy for you to stow that extra cash in an account that might work FOR you…after all, they MAY pay a little interest at least.

The other side of the coin? Well…those folks who got behind the 8-ball a few years ago and couldn’t pay their tax bills – for whatever reason – want to pay close attention to what happens here with their payroll withholdings. If you went into an Installment Agreement (herein referred to as an “IA”) with the IRS, where you’re making monthly payments to satisfy a tax obligation, one thing you “signed up” for is that you’d pay your taxes every year while under the IA. That means you need to hit that “tax season success” we mentioned earlier. BUT, one other detail you may have also missed is this: any refund that gets calculated in a future year (after the IA is put in place) doesn’t go to you…it goes to satisfy that debt. That means using the US Treasury as a savings account so you can take a cruise next summer just backfired because you owed $5K on an IA and must pay the IRS first. In this case, you may want to figure out how to get that W-4 much closer to a zero come tax time so that you can just keep making your monthly payments, and keep that excess cash coming directly to you (and…of course, put in savings, RIGHT?)

Like a knife through butter, right?

Done right and done well, I agree…it’s pretty easy. But incorrectly executed, you may as well have just pulled that butter out of the freezer because you’re going to need a hammer instead of a butter knife!

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About Our Firm

Tim Thompson CPA PLLC is located in Dallas, Texas and is an expert in all areas of Texas taxes. We can help with individual or business taxes, tax resolution, tax preparation, and tax planning services.