Your W-4

When I was still working seasonally doing taxes and had another job full time, every year my employer gave us a W-4 to complete for our file. For most of us, it was a inconvenience. But looking back it was a good idea. Besides making sure they had a current address, it made us think about our taxes and if we needed to make changes to our withholding. It forced many to do what they had put off all year, adjust their withholding. I don't know how many times I have suggested changing withholding to a client and the next year they still have the same problem because they never got around to taking a new W-4 to Human Resources.

But it doesn't do any good to fill out a new W-4 if you are just going to put same status and exemptions as the preceding year without at least considering making changes. Why should you make changes to your W-4?

• The Making Work Pay Credit is still in effect for 2010. This credit raises a lot of situations where a taxpayer may want to change their withholding. Please see my post on this.
• If you didn't like the results of last year's return and didn't make changes before, now is the time to plan for 2010. A little extra out of each paycheck is easier for your budget to absorb than a big balance due. And it works the other way too. A bigger than planned tax refund is a good reason to give yourself a little raise.
• Think about the changes coming in your life. Marriage, divorce, new baby or children growing up can all impact your taxes and should force a re-evaluation of your withholding.
• Other income will effect your taxes. Some can't be planned for in advance, like gambling winnings, but may trigger the need for a new W-4 during the year. A second job or a spouse taking a job or unemployment can cause a larger change to your taxes than withholding on the new income can cover.

The W-4 is the best tool the average taxpayer has to protect against a nasty tax surprise. It can't reduce their actual tax but it can allow the working person a method of easily fullfilling their tax obligations. But it's up to you to maintain the tool and keep it working for you.