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Anne Powelson Anne Powelson
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Two common and unpleasant withholding surprises

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Starting a new job? Switching jobs? You'll probably be asked to complete a Form W-4, Employee's Withholding Allowance Certificate. A W-4 sets how much tax is withheld from your income. Taxes are due when income is earned; if you owe too much at the end of the year you may owe a penalty. On the other hand, you don't earn any interest on large refunds, so you might not want excess withholding.

So what should you do? Most people don't read tax forms, and in the case of the W-4 that's probably just as well. That's because the W-4 instructions are not perfect. Here are two common problems with the W-4.

First a minor issue: what happens if you follow the instructions?The W-4 states if you are single and are not a dependent, you may claim two allowances. What it doesn't say is what the result of that action will be. Claiming single with two allowances means that taxes withheld are likely to be very close to the federal taxes which are due. You may receive a small refund, or you may owe a small amount.

Some financial advisors recommend minimizing tax refunds, using your money yourself through the year. That's what makes this a minor issue. But I wish the W-4 form let you know you might owe if you follow its guidance. If writing a check at tax time would be a problem, you're safer claiming 'Single' and '1' or '0.'

The bigger issue: a W-4 does not say what the difference is between 'Single' and 'Married' withholding status.Most people assume those relate to the filing status they will use. Not true. They refer to different withholding tables in IRS Publication 15, Circular E. One set of tables, the Single set, is calculated figuring the taxes that are due with a single level of deduction and tax rates that change at the single level. The other set, the Married set, is calculated using the married level of deduction and tax rates at the Married level.

And what does that mean to taxpayers? Basically, the 'Married' withholding status should be used only if there is just one income in the household.

If both spouses work and use the 'Married' withholding levels, double the standard married deduction will be allowed from their combined income. Their combined income will have taxes withheld as if they will be given a deduction of $24,800. Compare that to the standard deduction for a married couple: $12,400. In effect, an additional $12,400 has no taxes withheld for it. Without major itemization or tax credits, that couple will wind up owing a significant amount.

Those are just two issues with withholding tables. Withholding tables are pretty basic. There is no separate set of withholdings for second jobs. And a different withholding level may be optimal for Maine. Whatever your situation - if you have changes, new dependents, returning to school, becoming a landlord or if you are just concerned - you should check with a tax professional so you aren't surprised when you file.


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