A sharp pencil on W-4 withholding form may save trouble later

``... neither Form W-4 nor the wage withholding tables is to be made more complex when they are revised in accordance with the provisions of the bill.'' That was what Congress intended, according to the Senate Finance Committee report that accompanied the Tax Reform Act of 1986. But anyone who has tried to fill out the new W-4 already knows that intent and reality sometimes don't quite meet.

It used to take five or 10 minutes to fill out a W-4 when you started a new job. For most people, that was the last time they saw one of these little forms. If they were especially conscientious, they filled out a new one when they got married, when a child was born, or whenever their economic picture changed. In each case, it still took only a few minutes.

Now, whether you want to or not, plan to spend at least 30 minutes, maybe an hour or more, on the new W-4, which is supposed to give your employer enough information to withhold at least 90 percent of the taxes you owe. If you need help, see your accountant. If you've been going to an office of one of the large tax return preparation firms, it may be able to help. But make sure it's done its homework.

``We had to spend a lot of time researching this so we could help our clients fill out the W-4,'' says Ellen E. Crane, a tax supervisor with Coopers & Lybrand, the accounting firm.

The Internal Revenue Service (IRS), which designed the new form and the 3 pages of instructions that go with it, says the additional complexity was needed to comply with the mandate of Congress that employers collect as close to 100 percent of taxes owed through withholding as possible.

``We don't have any plans to make changes in the form,'' IRS spokesman Steven Pyrek says, despite a call last week by Sen. Lloyd Bentsen (D) of Texas that the IRS withdraw and revise it. Presumably, other members of Congress will make similar recommendations as they try to complete their own W-4s.

``It reflects what Congress wrote in the law, that we come up with a more accurate method of collecting the right amount of taxes through withholding,'' Mr. Pyrek continued.

Most taxpayers, he says, won't have to do more than fill in the first five lines of the worksheet to complete the W-4. That may be true, but almost everyone who has a home mortgage, plans to itemize deductions, or has a spouse who works can expect to spend almost as much time on the new W-4 as on the 1040.

``And that's without the W-2s, the 1099s, and all the other documents you get to help you with the 1040,'' Ms. Crane points out.

As you look at the W-4 your employer recently handed out - or should have by now - there are four key points to remember:

1.You have to fill it out. It must be done by Oct. 1, but the sooner you do it, the more accurate your withholding for the rest of the year will be.

2.In filling it out, you will have to make some estimates - or even wild guesses - about this year's wages, outside income, interest, dividends, deductions, and tax credits.

3.Don't expect to complete the W-4 and forget it. After a couple of paychecks, see if enough is being withheld. If more is needed, turn in a new W-4.

4.If at least 90 percent of what you owe isn't withheld or prepaid in estimated quarterly tax payments, you'll have to pay a penalty on the shortage, in addition to the taxes you owe.

There are four lines on the worksheet that require estimates of coming financial attractions. They are Lines F, G, K, and Q.

Line F asks you to give estimated adjustments to income. These include qualified contributions to an individual retirement account (be sure you know the new rules for IRA contributions), deductible business and investment losses, qualified alimony payments, and penalties for early withdrawal of savings.

Line G asks for an estimate of itemized deductions. Some of this will be relatively easy. If you have a mortgage, look at how much mortgage interest and property taxes you paid last year. Your lender may have already sent you the statement for 1986 to help with this. You may also be able to estimate charitable contributions and state and local taxes fairly closely.

Other deductions won't be so easy and are even absurd to guess at. Who, for instance, can project his 1987 medical expenses in excess of 7.5 percent of adjusted gross income (AGI), or casualty and theft losses over 10 percent of AGI?

The best answer seems to be to take the deductions you know you'll have, then add a very small amount for miscellaneous deductions. If you wind up with more deductions, you'll be fine.

Line K seeks an estimate of tax credits for child and dependent care and credits for earned income. There's a little table under Line K to show how much of a break you get for this.

Line Q asks for an estimate of non-wage income. This includes interest on savings accounts, dividends from stocks and mutual funds, and outside or free-lance income. Here again, estimates may be difficult. If you expect to have a lot of outside income, or if one spouse's earnings come from commissions where nothing is withheld, plan to make estimated tax payments every quarter, based on the previous three months' income. Form 1040-ES is available for figuring out estimated payments.

Between and around these four lines are several other lines that will require your math skills, probably your calculator, and your patience.

To add to your paper work, the IRS has some other forms that may help with the W-4. Publication 590 gives the new rules for IRAs. Publication 553 explains miscellaneous deductions and tax credits.

Finally, after seeing how the new W-4 affects a couple of paychecks, everyone should spend a little time with a copy of Publication 919, ``Is My Withholding Correct?'' Many employers have them now.

If you've still given up, there's help. H&R Block, the giant tax preparation firm, is offering free assistance on the W-4 until Feb. 1. The company has not yet decided how much, if anything, it will charge after that, but it will ``probably be under $15,'' a spokesman says.

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