Washington, DC (April 26, 2007)—Breathing a sigh of relief because taxes are behind you? Don’t take the green eyeshade off just yet; while you still have a firm grip on your financial situation, there’s no time like the present to start planning for next year. Tax experts agree that a little planning can save you a lot of money.
For example, did you get a big refund this year? Think about it—you’ve been letting the government hold onto your money, interest-free, for months now, when it could have been growing in the investment of your choice. According to the IRS, the average refund as of April 6 was $2,366, up from last year’s $2,290. This could be because many taxpayers don’t mind parking their funds with Uncle Sam.
"While financial experts correctly advise taxpayers who get large refunds to adjust their W-4 forms, the reality is that many taxpayers use their tax refunds for forced savings,” say Frank Degen, EA, a past president of the National Association of Enrolled Agents (NAEA). “The refund buys the new hi-def TV or pays for the family vacation or pays off a charge card bill. Will an extra $45.50 a week in the taxpayer's pocket be as valuable as the $2,366 federal tax refund? Taxpayers should consult their enrolled agent to decide what works best for them."
If you are among those who have the iron discipline to stow that weekly $45.50 into an interest-bearing account as it is received, or if you would just prefer to have that cash trickle in now rather than splash you later, fixing this problem could be as easy as adjusting your W-4 form. The W-4 is the form that you filled out when you first started your job in order to let your employer know how much federal income tax to withhold from your paycheck. Because situations change all the time (marriage, divorce, home purchases and sales, births and deaths) tax experts recommend that you re-evaluate your withholdings annually. To increase or decrease the amount withheld, change the number of allowances on your W-4. For most people, this is the same as the number of personal exemptions they claim on their tax return. If you itemize your deductions, use the worksheet on page 2 of the W-4. If you have a second job, make sure that you claim zero allowances on the W-4 for that job. Claiming “exempt” is not the same as claiming “zero.”
More help figuring out the right amount to be withheld comes from the IRS in the form of a “Withholding Calculator.” Most people find it more accurate and easier to use than the worksheets that accompany Form W-4. You can access the IRS Withholding Calculator by visiting www.irs.gov and typing “withholding calculator” into the search box.
Other advance planning may include investing in municipal bonds, taking advantage of credits and deductions for education, and putting every possible cent into a tax-deductible retirement fund. If you work for an employer who maintains a company retirement plan such as a 401(k), 403(b), or 457, contributing pre-tax dollars can substantially reduce your taxable income. For 2007, the government increased the maximum annual contribution amount to $15,500; due to the special pre-tax “catch-up” rules, employees 50 and older may contribute up to $20,500.
Finding this confusing? Perhaps that’s why over 60% of Americans now take advantage of the expertise of a professional tax preparer. But, alas, finding a trustworthy preparer can be as risky as doing your own taxes. The world is full of fly-by-night tax preparers who are either dishonest or incompetent (or both). Lacking a strong recommendation from a friend, many people are not sure where to turn. If your tax preparer is licensed (only enrolled agents, certified public accountants and attorneys are licensed), he or she has had to prove competence, fulfill continuing education requirements, and undergo a background check. While certified public accountants and attorneys may or may not specialize in tax, all enrolled agents are tax specialists. Meet with an enrolled agent now for advice on moves you can make throughout the year to improve your tax situation. To find an enrolled agent in your area, go to www.naea.org and click on “Find an Enrolled Agent.”
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The National Association of Enrolled Agents (NAEA) is a non-profit membership organization comprised of tax specialists licensed by the US Department of the Treasury. NAEA members are dedicated to maintaining the highest professional standards and to increasing the integrity of the tax administration system.