There are a number of reasons why many tax and financial experts are urging taxpayers to review their 2009 withholdings as it may be that due to the current economic crisis, the taxpayer’s income may either be reduced or in some cases substantially lower!
Due to dire economic downturn, the originally filed W-4 form would not correctly reflect the taxpayer’s current reality of both the current tax and financial position for tax year 2009.
Essentially, this translates in an employer possibly withholding an excessive amount of both federal and state income tax from the taxpayer’s paychecks. At moments like the current economic crisis and downturn, maybe it’s not prudent to have excessive amount withheld from your paycheck. Instead the taxpayers W-4 form should reflect his or her current economic situation, and should attempt to reduce his federal and state income tax withholdings so as to increase his take home pay.
The following circumstances should prompt the taxpayer to adjust his W-4 Form to lower both his federal and state withholding taxes. These are as follows:
1. The taxpayers 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 spouse could be reason enough to reduce the federal and state tax withholding by claiming the maximum allowable exemptions.
2. The 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 that 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. The 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 that the taxpayers are entitled to claim on their tax returns.
4. The 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. Thus these taxpayers may be entitled to claim an additional withholding allowance.
5. For 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.
Taxpayer’s previous strategy of overwithholding so as to plan for a tax refund may not be a smart idea for 2009 if the taxpayers are faced with an extremely difficult time meeting their current financial obligations. It is better not use credit cards or lines of credit to fund your current obligations and instead increasing your paycheck by maximizing your dependent allowances that you are legally entitled to by the IRS.