Understanding Your Withholding

Recent polls show Americans' New Year's resolutions primarily focus on improving their financial condition and boosting their savings. Although it's important to evaluate investment accounts, establish a budget and reduce debt, maximizing tax returns is equally pivotal in improving an individual's finances. With tax filing season not too far off, now may be a good time for taxpayers to evaluate their current withholding status and determine if any changes need to be made.

An individual's tax withholding is the amount of taxes taken out of their paychecks for a number of items, such as Social Security and Medicare - commonly referred to as FICA taxes. Medicare and Social Security are the easiest withholding taxes to factor in. In 2011, Medicare taxes will amount to 1.45 percent on all earnings and Social Security taxes will amount to 4.2 percent for all earnings up to $106,800. A taxpayer's withholding amount also depends on a number of other factors and impacts how much they will owe Uncle Sam at tax time or receive back in the form of a refund, so it's important to make sure the numbers are correct. Individuals who do not have enough taxes withheld will end up with a tax bill, while those who withhold too much will miss out on having more money in their paychecks each pay period.

State and local tax withholding is generally automatic unless the worker is employed outside his or her state of residence. In these cases, individuals should visit a tax preparer to understand the particular rules the individual states impose.

In order to determine an individual's federal income tax withholding, which is not set at a flat percentage rate, they will have to take their personal financial situation into account, including their marriage status, whether they've had a child, the number of dependents they claim, employment and other income factors. This information will be reported on an individual's W-4 form.

Individuals who have gotten married, had a baby or wish to change their withholding will need to request a new W-4 form from their employer and ensure he or she receives the updated information.

Consumers who have undergone a number of life changes over the past year may wish to consult a tax professional to look over their withholding documents and ensure they are filled out properly. Additionally, changes to a taxpayer's financial, marital or family situation may also affect which deductions and credits they are eligible for, which will also have an impact on their tax liability.

By: Liberty Tax Service

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Liberty Tax Service provides a computerized income tax preparation service and electronic tax filing. Each tax office offers customers audit assistance, a money back guarantee, and free tax return checking.