If you haven’t read my last post about cutting your federal tax withholding, Orange County Homeowners’ Guide to Cut Your Tax Withholding, please take a look before reading the information below. Once you have your federal W4 ready, your next steps are to file it and to verify you’re getting the savings you expect. The details below help provide insights regarding how to do this.

WHAT ABOUT THE CALIFORNIA TAX WITHHOLDING?

California has its own withholding form.  But it’s very easy to complete, once you’ve filled out the federal form. The major differences are:

• California asks separately about the people and the deductions
• You can’t deduct state and local income taxes on your California return
• The standard deduction is different
• You divide deductions by $1,000 (instead of $4,050)

Enter the number of people in the family on the first blank “Regular Withholding Allowances, Worksheet A” in line 1 of CA Form DE-4.  (Increase by one for each blind taxpayer.)

Make a note of your itemized deductions, but remember you can’t deduct California income tax on the California return. So this will be a lower number than you used for itemized deductions on the federal withholding form.   

Then subtract the standard deduction. For 2017, that’s $8,258 for married filing jointly with one job, unmarried head of household, or qualifying widower; it’s only $4,129 for dual income married, single, married filing separately, or married with multiple employers.

If the result is greater than zero, divide it by $1,000. That figure goes on the second blank “Estimated Deductions, Worksheet B” in line 1 of the DE-4.  

In the example used in the prior article, that family would enter 4 (for people) on the first blank, 29 (for deductions) on the second blank, and the total on line 1 is 4 + 29 = 33 allowances.

WHAT HAPPENS WHEN I TURN IN THE FORM?

When you give the forms to your payroll or human resources contacts, they will adjust your withholding in future paychecks, subject to normal lead time. Within the next one or two paychecks, you should see that your net take-home pay has increased!

Before you celebrate, however, multiply this period’s withholding by the remaining number of checks, add the year-to-date withholding, and be sure you are on track to withhold enough.  Double-check the results to avoid unpleasant news next April.

WILL ANYBODY QUESTION ME IF I CLAIM A HUGE NUMBER?

It’s important to be accurate and truthful in making your best estimate of income and deductions for the year. If you claim 10 or more allowances for withholding, your employer is required to forward the W4 to the IRS. Your payroll people might even contact you before they send it in, to be sure you want to claim that many, because the IRS may ask you to justify the number. If you’ve done the math accurately and truthfully, this is not a concern.

Over the years, I’ve helped dozens of my clients file W4s claiming 50 or more allowances. It just depends on the total deductions, adjustments, and other income or losses. For high- income families with large itemized deductions, high numbers of allowances are justified.

In just a handful of cases, the IRS sent my clients a form letter asking for justification. We typically sent in the W4 worksheets (neatly filled out, if we had done the original filing based on handwritten notes). And we never received any further inquiry. As additional support, you could also enclose a copy of the prior year’s Schedule A for the IRS to see, if your total deductions are expected to be in the same range again this year.

Always check with your professional tax advisor about anything out of the ordinary you propose to do with your W4. But in my years of experience:

1)    Claiming a large number of allowances is no big deal, if justified.

2)    The IRS seems to rarely inquire about large numbers.

3)    Justification is easy to provide through the W4 worksheets, which are just estimates, not commitments.

WHAT ELSE CAN TRIGGER OVER-WITHHOLDING?

The IRS basically wants you to pay your taxes evenly throughout the year. Withholding is how they collect taxes directly from wages. For other kinds of income, however, there is typically no withholding. So if you have significant other income, your tax advisor may recommend quarterly estimated payments of tax. These can distort your withholding calculation in several ways.

Although the W4 takes your other income into account, estimated payments are not considered, so the IRS may be withholding too much from your pay.

Tax preparers often have the prior year’s refund held back by the IRS, and applied toward this year’s tax. The W4 worksheets don’t ask about that, so applying prior year refunds can result in excessive withholding from your pay.

In a following article, I’ll share some “insider” tips about correcting super-high withholding, super-low withholding, and even failure to have made required estimated payments. But first, I have an offer for you.

MY OFFER TO YOU

If you would like to talk about your withholding, have me do the math, or have me check your math, just call or email me.  We can talk about what’s changing this year, and in just a few minutes on the phone I can probably help you fill out a W4. (This will be even more effective if you send me your most recent tax returns and a couple of recent paystubs.  But consider blacking out your Social Security number or address.)

I won’t charge you, and I won’t try to sell you anything. Why am I offering this? This gives you a no-pressure, complimentary look at how I interact with people, and how I make complex stuff easy to deal with.

Please note you are responsible for the W4 and DE-4 you file; I cannot accept liability for helping you at no cost. Also, I reserve the right to withdraw or modify this offer if I get inundated with withholding assistance requests!

Your WorthPointe financial advisor can make sure you and your tax advisor are on the same page regarding your income, deductions, cash flow, and withholding.  Working together, we can make sure you don’t have huge tax bills — or huge tax refunds — in April next year.

If you would like to brainstorm with us about any financial issues you are facing, please contact us here to start a conversation!

Watch for my next blog featuring California homeowners’ tax withholding insider tips!