Uncle Sam Income Tax Planning and a Guide to Tax Breaks

Record Tax Refunds in 2003: Are You Allowing Uncle Sam to Withhold Too Much of Your Money?

Thanks to the Jobs and Growth Tax Relief Reconciliation Act of 2003, a record number of tax refunds will be mailed to taxpayers. The tax rates were lowered at the start of 2003 but the amounts withheld were not adjusted until July 1, 2003. Furthermore, the standard deduction for married couples that do not itemize increased from $7,850 to $9,500. (For singles, the amount is half.) Also, the child credit was increased from $600 to $1,000. This was available to children that qualify under age 17 to joint filers with adjusted gross income up to $110,000 and to single filers or heads of households up to $75,000. The tax rates also fell for the higher tax brackets and the cutoff points for eligibility for the 10 and 15 per cent tax brackets were increased, which again translates into less taxes owed. The year 2003 brought great tax breaks, some of which will expire this year –such as the $1,000 child tax credit. These “breaks” will gradually fade out by 2010. After 2010, the tax code will return to the 2001 law.

Why is any of this important? Seize this opportunity while you can and put some of your hard-earned dollars to use for you through proper income tax planning and via our guide to tax breaks.

PAYING YOUR FAIR SHARE

Yes, there is a record budget deficit, but no, you do not have to give the government a 12-month interest free loan. This is money that you have earned throughout the year that you may have contributed to pay down debt during the year or better yet put aside into your emergency fund.

Many enjoy and look forward to receiving their tax refunds in the mail around this time (people who receive refunds tend to file early). The daunting question is: why? Why have Uncle Sam retain your money without interest when you could put it aside yourself with interest. Even though everyone agrees that it makes logical sense to hold o­nto your money yourself, a vast majority of Americans still take the “I'll give it to Uncle Sam and let him give it back” route.

How do you avoid overpaying? By simply paying what you owe and not more than this, you will avoid the refund. The W-4 form that you filled out when you first starting working at your current job may be changed at any time. It is o­n the W-4 form that you elect the number of allowances that you want to make. “Allowances” are basically credits, exemptions, or some other form of tax benefit that you intend to claim when you complete your tax form. Allowances reduce the sum of taxes withheld.

You should have withheld from your paycheck at least 90% percent of what you estimate that you will owe. A worksheet comes with the W-4 form to assist you in determining the amount that should be withheld. By paying the minimum amount necessary during the year there will be no interest or penalty when you file o­n or before April 15 th as long as you owe less than $1,000, you have paid in 90% of the current year's liability and you have paid all of the prior year's total tax.

DO NOT TRY THIS AT HOME

Some tax savvy individuals have nothing withheld from your paycheck the first ten months of the year and save the excess in an interest bearing account. The last two months of the year, they have the entire year's amount withheld. (The company accountant may not like this, but cannot deny this request according to Internal Revenue Code). The IRS allows you pay during the year but does not specify when the payments are to reach its offices. This method is only for the highly disciplined.

IRRESITIBLE REFUND

Stay in control of your money. Many prefer the refund because they fear they will just “blow” the money anyway and it seems like a reward to receive this “lump sum”. The average refund is around $1700. This would be around $141 per month extra if you adjust your withholding amount. This tidy sum is money that you could have saved yourself and put away in a money market account or other savings vehicle.