ADJUSTING YOUR WITHHOLDING COULD BE A SMART MONEY MOVE

Did you receive a big refund check from last year’s taxes? If so, you’re not alone. Many of us deliberately pay extra taxes throughout the year so we can enjoy a nice bonus early the next year. Sometimes it’s insurance against having to come up with extra cash when you file your return. That’s a valid concern. But sometimes it’s just a form of enforced saving. Or perhaps you’ve simply never bothered to adjust your withholding. Those aren’t such good reasons. After all, when you overpay your taxes, you’re making an interest-free loan to the government.

Should you adjust your withholding? Reducing your withholding is as simple as filing a new Form W-4 with your employer. The form comes with a worksheet to figure out how many allowances you should claim. Don’t forget to allow for other taxable income besides wages, such as dividends or investment gains.

If you’re worried about underpaying tax, there are a couple of rules you should know. Generally, you’ll escape a penalty if you pay, through withholding or quarterly estimated payments, at least 100% of last year’s taxes (110% if your adjusted gross income is over $150,000), or if you pay at least 90% of what you owe for this year.

If you reduce withholding, here are some ideas on how to use your extra take-home pay:

• Contribute more to your employer’s 401(k) plan, especially if your company matches contributions. You’ll enjoy a double benefit because the extra contributions will reduce the tax on your wages as well as provide tax-deferred savings.

• Pay down balances you’re carrying on your credit cards. That’s equivalent to earning interest on your extra payments, often at double-digit rates.

• Put the money in a tax-favored Coverdell IRA or Section 529 plan for your child’s education.

Contact our office if you’d like help figuring out your withholding level.

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COMBINE BUSINESS, PLEASURE, AND TAX BREAKS ON SUMMER TRIPS

For a couple years I ‘ve been blaming it on lack of sleep and too much pressure from my job, but now I found out the real reason: I’m tired because I’m overworked. The population of this country is 237 million. 104 million are retired. That leaves 133 million to do the work. There are 85 million in school, which leaves 48 million to do the work. Of this there are 29 million employed by the federal government, leaving 19 million to do the work. 2.8 million are in the Armed Forces, which leaves 16.2 million to do the work. Take from the total the 14.8 million people who work for State and City Governments and that leaves 1.4 million to do the work. At any given time there are 188,000 people in hospitals, leaving 1,212,000 to do the work. Now, there are 1,211,998 people in prisons. That leaves just two people to do the work. You and me. And you’re sitting there reading jokes. Talal Sultan.

Do you plan on mixing pleasure with business on a trip this summer? There’s no problem from a tax perspective as long as you follow a basic precept: The primary purpose of the travel must be business-related. Otherwise, you’ll forfeit valuable tax deductions.

On the other hand, if you stick to the tax itinerary, you can write off most of your travel costs – even though you’re spending part of the time on personal pursuits. The key is to record significantly more “business days” than “personal days” on the trip.

Example: John Green, a self-employed individual, flies cross-country on Monday to make a presentation to a client. He is in business meetings Tuesday through Thursday. On Friday, the client inks the deal. John decides to spend the weekend playing golf and lounging by the pool. He flies home the following Monday.

The round-trip airfare costs John $1,500. He also incurs $1,400 in lodging ($200 a day) and $800 in meals ($100 a day) during his eight-day trip.

On these facts, John spends six days on business – the two days traveling count as business days – and only two days on pleasure. So the trip qualifies as business-related travel. He can deduct the entire airfare as well as five days’ lodging and 50% of the meals attributable to his business stay. Result: John deducts a total of $2,800 ($1,500 airfare, $1,000 lodging and $300 meals).

Note that any personal expenses, such as green fees at the golf course, are nondeductible. Also, if family members accompany you on a trip, you can’t deduct their expenses, but your travel may still qualify as business-related. As always, there is an exception to this rule where a family member is an employee on payroll and that family members participation in the deal is both ordinary and necessary.

Of course, this is just a brief summary of the pertinent tax rules. To review the tax requirements for your travel plans, check with us before you hop on board.