| Arizona Republic
Taxes 101: File with a tax professional or software?With tax deadline approaching, the number one question to consider: Should you hire a tax professional or use tax software? We explain.USA TODAYAfter a tumultuous year that has upended traditional employment, millions of Americans could face income-tax surprises. One way to reduce the odds of owing a big bill to Uncle Sam — or paying out too much and thus giving an interest-free loan to the government — is to check your withholding.More than a year ago, the Internal Revenue Service released a redesigned form W-4 on which taxpayers figure how much money they should withhold from their paychecks. Most taxpayers so far appear to have ignored it.Three in four individuals received refunds last year that averaged $2,500 per recipient — that’s an interest-free loan to the government that could certainly get put to a better use.Much has changed in the past year, including job losses and taxable unemployment benefits for some people, taxable retirement-account withdrawals, overtime or extra-hours pay for workers in many essential industries and a volatile stock market that spewed out capital gains and losses.New employees fill out W-4s when starting a job but often neglect to update their information after that. Updates aren’t required, and 45% of respondents in a recent survey reported that they didn’t remember when they last revised their information.One in nine taxpayers said they had never heard of W-4s, according to the survey released by the Harris Poll and American Institute of Certified Public Accountants.Updates aren’t especially difficult or time-consuming. Now could be a good time to do it, with a full year of salary, withholding and other information to review. A tax withholding calculator provided by the Internal Revenue Service is worth completing first. It can be found at https://www.irs.gov/payments/tax-withholding.Thank you for subscribing. This premium content is made possible because of your continued support of local journalism.What’s different about the new W-4?The updated W-4 no longer includes allowances — which were based on the number of personal and dependent exemptions you had — and makes it easier for taxpayers to coordinate their tax situation across multiple jobs and with a working spouse, according to the accountants institute.A late start to filing taxes? IRS tax season 2021 officially kicks off Feb. 12. Here’s why it starts so lateWhen the screens are nearly as big as your car: Screens in cars are getting even bigger? Is it safe?The new form “provides simplified steps to account for dependents, multiple jobs and other items that can affect the amount of tax owed,” said Neal Stern, a certified public accountant and member of a financial literacy group of the organization. The prior version “focused mainly on the number of taxpayers included in the tax return and often required use of separate worksheets to calculate additional withholding needs,” he said.Based on the organization’s survey, only 26% of taxpayers have updated their withholding since the IRS released the redesigned W-4 in December 2019.Is it a good time to check withholding?Yes. While it’s too late to affect withholding for 2020, changes you make now will adjust amounts for the coming year.While there wasn’t sweeping tax-reform legislation last year, the financial situations of many people have changed. For example, many more Americans now are receiving jobless benefits, which are taxable. Some also have withdrawn taxable funds from retirement plans. Others sold unsheltered stocks or other investments at a profit.”If you owed a lot of tax or had a huge refund, you should take a look at withholding to get closer,” said Bailey Tocco, a certified public accountant and managing director at CBIZ MHM in Phoenix. Recent pay increases or decreases are other reasons to take a look, she said.Some 53% of respondents in a LendEDU survey last year said they were worried about tax debts in 2021. A good way to minimize the possibility of owing money to federal or state tax authorities is to adjust withholding (or make estimated quarterly payments).States that levy income taxes have their own withholding forms — it’s A-4 in Arizona. The Arizona form is easy to use and intuitive, Tocco said, as you simply choose what percentage of income you would like to have withheld.Must taxpayers submit new W-4s?Aside from starting a new job, no. But doing so could make for a smoother ride.“People tend to overlook a few extra bucks in their take-home pay, but they sure notice when they get a $300 tax bill instead of a $1,500 refund,” said Gregory Anton, a CPA and chairman of the financial-literacy group for the accountants institute.Updates are especially important if your personal circumstances have changed, such as taking on an additional job, getting married or divorced, or having a new child.If two spouses are employed, should both provide updated W-4s?Yes, each spouse should complete one. Only half of the survey respondents said they knew about this recommendation.What’s wrong with withholding too much?Many people do rely on hefty refunds to pay down debts, purchase big-ticket items and so on. The AICPA survey found that more than half of respondents purposely withheld an incorrect amount, with most preferring to overpay to receive a refund.But one drawback is the opportunity cost of not having use of the money earlier. The IRS typically doesn’t pay much or any interest on refunds, making over withholding a poor investment decision, said Tocco.”Especially for people who don’t have much set aside to cover emergencies, it’s often better to avoid over-withholding and be able to access the money you’ve earned if it’s needed for financial stress like an unexpected major repair bill or temporary loss of income,” said Stern.Besides, the IRS last year was tardy in paying some refunds owing to office-shutting measures tied to the pandemic. Thus, there’s a risk of having to wait longer than usual for a refund, and that’s frustrating.Are there other consequences of not withholding enough?Yes. You could incur an underpayment penalty.”Most taxpayers face a possible underpayment penalty from the IRS if they owe more than $1,000 at tax time and haven’t paid in at least 90% of their tax for the current year or 100% of their tax for the previous year, whichever is smaller,” said Stern. States also may levy underpayment penalties. According to IRS statistics as of late July cited by the accountants institute, the average tax bill for Americans who owe money at filing time is roughly $5,500. Yet two in five respondents said they weren’t confident that they could pay even a $3,000 tax bill on short notice without borrowing or charging the balance on a credit card.Do independent contractors submit a W-4?No. These people usually satisfy their tax obligations by paying estimated taxes based on earnings in four equal installments throughout the year. “However, employees who have side work as an independent contractor should consider updating their W-4 to take their additional income into account,” Stern said.What’s involved in filing a new W-4?A good first step is first to estimate how much you might owe using the IRS’ tax withholding estimator at https://www.irs.gov/payments/tax-withholding . You will need information handy from a recent pay stub and your income-tax return from last year. The IRS estimator allows you to play around with various actions that can affect your answer such as retirement-account withdrawals you might take during the year. You can do it all anonymously.Other factors that can make it more difficult to estimate withholding include multiple jobs, rental income and additional investment income, said ToccoAfter that, you should submit a W-4 through your human-resources department at work, or first download the form at irs.gov, fill it out and then give it to your employer. What if I made a mistake or I’m not satisfied with the results?Then you can submit another W-4. In the accountants institute survey, only one-third of respondents knew that forms can be updated throughout the year.Reach the reporter at firstname.lastname@example.org.