Withholding taxes are very important to the federal government. Payroll taxes account for over a third of all federal revenue.

These taxes are even more important to American families. Many families do not prepay estimated taxes. Since they only pay withholding taxes, a good W-4 withholding plan is essential. Otherwise, a family could have a very big tax refund or a very big tax bill in the spring. Typically, it’s a good idea to avoid either outcome and work toward tax balance (no refund and no bill).

A certified tax coach can shed some additional light on the W-4 tax planning methods discussed below. This form tells employers how much money to withhold for income taxes. The information this form contains is largely up to the individual taxpayer.

Tax Planning Basics

Filing status and number of allowances in Sections 3 and 5 are the most prominent tax planning tools in the W-4. And, they are also the easiest ones to use.

Generally, married people pay lower taxes than single people. On the 1040, filing status must match legal status. Married people cannot claim they are single. But on the W-4, taxpayers may claim either status, regardless of their legal status.

As for allowances, the more you claim, the more take-home pay you have. So, a high number of allowances is good for a monthly budget, but it may result in tax liability. There is some flexibility here as well. Taxpayers cannot over-claim allowances, but they can under-claim them. If Joe and Mary have three children, Joe may claim up to five allowances at work (one for himself, one for Mary, and one for each child). He can claim fewer than five allowances if he wants, and thereby adjust his withholding amount.

W-4 Tax Planning, Part II

Section 6 is the manual withholding option. A little additional withholding makes a big difference. If the checks come twice a month, $50 extra could mean an extra $1,200 at the end of the year. That money could mean a larger refund in April, or it could offset tax liability in other areas. More on that below.

Bear in mind that employees can amend their W-4s at any time. So, if you try one withholding strategy, and it does not work out, you are not locked into it for the rest of the year.

In many cases, tax withholding does not occur in a vacuum. Many families own homes, receive alimony payments, freelance on the side, and/or collect non-employment income. All these things could affect tax liability. Withholding adjustment is an easy way to account for these things.

Everyone knows about income taxes and sales taxes, but we tend to forget about excise taxes, because they’re not obvious. Click through for an introduction to this important class of taxes, and see what’s changed.

Excise taxes are paid when purchases are made on specific goods or activities, such as wagering or highway usage by trucks. The producers or merchants pay the tax and typically include the additional tax in the price to the end consumer. Governments levy excise taxes on goods and services that have a high social cost, such as cigarettes, alcohol and gambling. Excise taxes are also referred to as selective sales or differential commodity taxes.

Here are six key facts regarding common, little-known excise taxes —

• The tax reform bill exempted certain payments made by an aircraft owner or sometimes a lessee, related to the management of private aircraft, from excise taxes imposed on taxable transportation by air.
• To support the use of alternative fuels, fuel tax credits are allowed on certain types of fuel including the following: biodiesel, including renewable diesel and mixture; alternative fuel credit and mixture; and second-generation biofuel producer.
• Indoor tanning service providers may need to file a federal excise tax return. These services are subject to a 10 percent excise tax under the Affordable Care Act. This is an example of how excise taxes are often levied on goods and services that are considered unnecessary.
• Taxpayers who engage in certain specified activities related to excise tax must be registered by the IRS before engaging in the activity. This is known as the 637 registration program. The taxpayer can go online to confirm whether they or a specific company has a valid IRS registration.
• You may be surprised to know that there is an archery federal excise tax, including the importation and manufacture of archery and fishing products. These, of course, affect relatively few people, but are good examples of how a product or service may be subject to a particular excise tax that is not necessarily obvious.
• The Environmental Protection Agency’s list of devices to reduce high tractor idling may be exempt from the 12 percent retail excise tax. This shows that a major component of the excise program is motor fuel, and different rates may apply to different types of fuel — gasoline, diesel and gasohol.

The idea is to limit the use of certain products, such as alcohol and tobacco. States also levy excise taxes. Some people say that excise taxes are stopgap measures to solve short-term problems. In fact, some note that discriminatory excises on the consumption of specified products is a step back in development of fiscal systems, postponing a more proper reform for the country or state.

Are you unsure how excise taxes may affect you? Give us a call so we can help you with your situation.

The expertise of a Certified Tax Coach is essential to reducing taxes and maximizing revenues and income for small business owners. Call our Sacramento, Sacramento Accountant today at 888-534-9425 or request your free consultation online.