How to Fill Out a 2012 Form W-4

Form W-4When go to work for “the man,” you will be expected to fill out a Form W-4. This is a form provided by the IRS that helps employers figure out how much money should be taken out of each paycheck and sent on to Uncle Sam. The way you fill out your W-4 determines how much of your paycheck is withheld. And how much of your paycheck is withheld determines how much money you owe in April, or how big of a refund you get back.

For many, the sweet spot is figuring out the withholding so that you don’t owe a lot of money come tax time, but also so that you don’t have a huge refund, which is tantamount to giving the government an interest-free loan. The idea is to get yourself as close to 0 as possible. If you want to adjust your withholding to better reflect your tax liability, all you have to do is fill out and turn in a new W-4.

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2012 IRS Tax Brackets

Tax BracketsNow that we’re in the heart of tax season and the tax brackets for the current calendar year have been finalized, I’m ready to take off the “sneak peek” off the label for the 2012 IRS tax brackets. Our original figures were not off, the 2012 tax brackets were exactly how we predicted and that’s in part because we knew what inflation would be (and it’s effects on our tax structure).

The current tax brackets, that is the tax brackets that are in effect for the 2012 tax year, can be found on this archived page for 2011 tax brackets. These apply for tax year 2011, which you are preparing for today. The rates below will apply when you go to file your taxes in 2013. I know it’s confusing but this is how the cool tax kids talk about it.

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What is the Average Tax Refund?

average tax refundAs of March 22nd, the average tax refund stands at just a hair under three thousand dollars. At this time last year, the average was a little over that amount, sitting at $3,030 (the average for last year would later fall to $2,803 as later filers were accounted for).

As is always the case earlier in the season, this average will likely go down. It’s usually higher because people due refunds tend to file earlier than those who are not expecting one. If you were due a refund, it may make sense to adjust your tax withholding as you don’t want to give Uncle Sam 25% of your income.

I wanted to dig a little deeper on the question of average income tax refund because nearly three thousand dollars seems really high but it actually isn’t. It took a bit of searching but after some research into their SOI Tax Stats page, I was able to glean a few gems about the average tax refund.

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What Tax Bracket Am I In?

I get this question a lot and despite the availability of the IRS tax brackets, it’s not always clear how to figure out which tax bracket you are in. Fortunately with a little math and some approximation, it’s quite simple to figure out which tax bracket you are in. A common mistake is to just look at your salary and look at the table, that ignores your personal exemption (and any you get for dependents) plus your deductions. We can do a better job at approximating than that!

Why do you want to know? The biggest reason most people want to know is for tax planning purposes. If you’re going to be in a higher tax bracket this year, it pays to accelerate your deductions (make larger donations this year, pay your mortgage a little early to get the interest deduction, etc.) into 2011 rather than wait until 2012. If you know you’re going to be in a higher tax bracket next year, it pays to delay them (assuming the time difference is not a factor). In the end, will it matter if you are in the 28% or 25% tax bracket? Not necessarily but we want to get as accurate as possible without going too deep that we get caught up in the minor details.

So, let’s figure this out.

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Kiddie Tax: Taxes on Your Child’s Investment Income

Kiddie TaxInvesting is one of those lessons that your children can learn. Teens can begin learning about investing, and the ways it can benefit them. However, anytime your child has an investment, he or she has the potential to make money. Of course, as with most income, the government wants its cut. So, your child will have to pay taxes on the income received from investments, dividends and interest.

The tax on children’s investment income is known as the Kiddie Tax. If you are thinking of sheltering some of your investment assets as a child’s, or if your child has done pretty well with his or her investments during the year, you need to be aware of the basics related to the Kiddie Tax:

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5 Middle Class Tax Breaks

I have heard a ton about tax breaks for the wealthy over the last two years. I have also heard a few things about tax breaks for the poor but didn’t know any details. I seldom heard about tax breaks for middle class individuals though. I thought I could do us all a favor and write about tax breaks I saw mentioned at Kiplinger. You may be able to benefit by taking advantage of the following tax breaks for the middle and lower income classes (and some of these may apply even if you are in the upper echelons of the IRS tax brackets).

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Pawlenty Suggests New Tax Structure & The Google Test

Taxes, especially within the context of our deficit, have become a popular subject these days. The latest person to weigh in was Former Minnesota Governor Tim Pawlenty when he proposed a new tax structure along with his announcement that he’d be seeking the Republican presidential nomination. The plan is simple:

  • Reduce corporate taxes from 35% to 15%;
  • Tax the first $50,000 of personal income at 10% ($100,000 for married couples), and 25% for the rest;
  • No taxes on capital gains, dividends, interest income, and inheritance.

Assuming all other tax deductions and credits were held the same, this would reduce tax revenue generated from individuals and families. The existing tax brackets tax at higher rates for personal income and there really are no “losers” if the tax structure were to go in this direction. Where I believe the proposal is the trickiest has to do with the corporate tax rate – where companies now have a greater incentive, because of lower tax rates, to recognize income they would otherwise keep abroad. We could generate more revenue because the tax rate is lower. Whatever actually happen is irrelevant, the interesting part of the discussion is what he said in conjunction with this proposal – The Google Test:

“If you can find a good or service on the Internet, then the federal government probably doesn’t need to be doing it,” Mr. Pawlenty says. “The post office, the government printing office, Amtrak, Fannie [Mae] and Freddie [Mac], were all built in a time in our country when the private sector did not adequately provide those products. That’s no longer the case.”

I think the test may be too simplistic but the idea merits discussion. The USPS’s insolvency was a topic of discussion here just recently (and I agree with the commenters that said a comparison to UPS/Fedex is unfair because they can cherry pick where they compete – i.e. not on first class letter delivery) but I think we need the same for every service. Do we need Freddie Mac and Fannie Mae to gobble up home loans? Perhaps, but it should be up for debate.


 Your Take 

Your Take: Do Tax Shelters, Dodges, and Rolls Anger You?

Form 1040I’m a big fan of Bloomberg Businessweek, especially their iPad app where you can download your subscription and take it anywhere, and recently they had a really interesting special report called How to Pay No Taxes – very good reading. It held a lot of insights into how the wealthy are able to avoid taxes in entirely legal, and very clever, ways. They’re all strategies that make sense when you’re moving millions of dollars around because the costs of paying accountants, lawyers, and the like are likely in the tens and hundreds of thousands of dollars. It makes less sense if you’re just moving several thousand around.

As I read the article, I was about to get annoyed at all the sheltering and dodging until I realized it’s just part of the game. Our tax structure has gotten so complicated, it’s basically a game. Consider this – the United States has one of the highest corporate income tax rates at 35%. Yet, after all the loopholes and credits and other tax breaks, corporations, in aggregate, pay about average. The difference is that certain industries pay a lot less and others pay more.

It’s like playing a game and finding out that one of the other players has discovered the optimal strategy before you do. They’re beating your pants off because they’re smarter than you. Can you really get that upset because they figured it out? I suppose you can get upset at anything but the reality is that you have to change the rules… right?

Check out the list of 11 moves and tell me what you feel!

(Photo: aidanmorgan)

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