Tax Tips
Adjust withholding through year
Gina L. Gwozdz

As far as income taxes are concerned, we have a "pay as you go" system.

We called it this because income taxes are required to be paid as you generate taxable income either through withholding or estimated tax payments.

Withholding is the amount of taxes that are taken out of your paycheck as you earn your money.

This allows the government to track how much money you are making and how much taxes they are collecting throughout the year.

It also makes it harder for you to realize how much taxes you are paying.

If you are self-employed then you will not have wages so the IRS requires that you make estimated tax payments on a quarterly basis.

You are required to estimate your total taxes for the year, and then pay the appropriate quarterly amount due.

For 2006, you should have paid 22.5 percent by April 17, 2006, 45 percent by June 15, 2006, 67.5 percent by Sept. 15, 2006 and should pay 90 percent by January 16, 2007.

If you do not pay in enough federal income taxes by the end of the year you will owe the IRS interest on the taxes you should have paid, when you should have paid them.

In order to avoid paying interest in 2006, the amount that you would need to withhold (or pay in estimated tax payments) depends on your 2005 Adjusted Gross Income (AGI).

If your 2005 AGI was $150,000 or less, you’ll need to withhold 100 percent of the amount of your 2005 tax liability or 90 percent of your 2006 tax liability.

If your 2005 Adjusted Gross Income was more than $150,000, you’ll need to withhold 110 percent of your 2005 tax liability or 90 percent of your 2006 tax liability.

However, if you pay in more federal taxes than you are required to, the IRS keeps your money interest free.

Since your taxable income is rarely computed based on your wages alone, and often times your tax situation changes throughout the year is it advisable to review and adjust your withholding (or estimated tax payments) throughout the year.

Question and answer: Income averaging

Bill from San Antonio asks:

Do you know if there is any way for me to average my taxes between two years, like if I had a really good year last year and a really bad year this year, can I average the two years?

This may be a silly question, but I thought I would ask to make sure because I heard it’s possible. Thanks, Bill

Answer:

I have no way of knowing, from your e-mail, if you would be able to average your taxes between two years. For most taxpayers, this is no longer possible (this was possible about 20 years ago).

However, it is still possible for farmers.

Since it is common for farmers to have large fluctuations in their income from year to year, they may elect to average their income over the previous three years.

Since we are dealing with the tax code, it is not a simple "averaging" of income.

Thus, if you believe this may apply to your situation you should seek the help of a qualified tax professional.

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Gina L. Gwozdz is a Bullard resident and certified public accountant. You may reach her via her web site at http://glgcpa.blogspot.com/