Income Tax Planning

Time to Test Your Withholding

Now is the time to prepare an estimate of your 2002 income taxes

Kenneth L. Decker, CPA-PFS, CFP, Decker & Associates, Inc. Executive Vice President

As we often remind our clients, the United States has a “pay-as-you-go” tax system. This means you pay the US government as soon as you earn or receive income that is taxable. If you do not withhold enough income tax or if you do not pay sufficient estimated tax, you will be subject to interest and penalties.

Even when tax is withheld on income, you could be under-withheld. Let’s see why.

In addition to normal salary, you may receive bonuses, vacation pay, interest, dividends, rental income, or exercise non-qualified or incentive stock options. All of these additional forms of income have one thing in common; either no income tax is withheld or 28% income tax is withheld Additionally, if both spouses work, there is the possibility of under-withholding. Either situation could lead to under-withholding.

September is an excellent month to prepare a tax estimate for 2002 to assure you that your payroll income tax withholding is sufficient.

If you used a tax program to prepare your 2001 return, simply save your 2001 file under a different name, change the numbers of the new file to the income, expenses and estimated withholding for 2002. The result will be close enough to get your withholding in the ballpark to prevent under-withholding penalties.

If you need help preparing your estimate, hire a qualified professional who will also take into consideration company benefits which may be used to lower taxable income.

You can avoid underpayment penalties for 2002, if:

  1. Your adjusted gross income (AGI) is less than $150,l000 and
    1. You pay 100% of the tax shown on your 2001 tax return. (The tax year must have been the entire calendar year), or
    2. You pay 90% of your actual tax for 2002
  2. Your AGI is $150,000 or more and
    1. You pay 112% of the total tax from your 2001 tax return or
    2. 90% of your actual tax for 2002.

The under-withholding penalty is based on the federal short-term interest rate plus three percentage points. The rate is adjusted every calendar quarter so the penalty must be calculated separately for each estimated tax installment.

But, let’s not get to the underpayment stage. Prepare you 2002 tax estimate now!

Action Plan

 

Employers:

Remind all your employees to prepare a 2002 tax estimate so they won’t be unpleasantly surprised in April 2002.

Decker & Associates, Inc., through our alliance with DECKER FINANCIAL, Certified Public Accountants, can help your employees prepare their 2002 tax estimates and adjust their income tax withholding through their Form W-4.

Employees:

Either prepare your 2002 estimate and adjust your income tax withholding accordingly, or contact us at Decker and Associates, Inc. and we will help you prepare the estimate and complete a new Form W-4 to adjust your company withholding.