Feb 19, 2008

Form W-4: What if I fill it out incorrectly?

Most employers allow you the opportunity (if they don't - they should!) to change your federal and state income tax withholding (federal is "FITW") routinely. Many fill out their Form W-4 based on their filing status and number of dependents (i.e. married with 2 children will fill out the Form W-4 with "Married" and "4" exemptions). This is generally correct and will closely approximate the amount of tax you will need to have withheld at the end of the year to not owe taxes.

However, if you have significant income that is not subject to withholding (i.e. pension income, investment income, etc.) or are underwithheld on your wages, you may have a tax debt at the end of the year. If you do this consistently, year after year, owe at the end of the year, and do not immediately resolve the matter by paying the taxes with the return filed, the IRS may fix your FITW and your Form W-4 for you via a lock-in letter.

The lock-in letter is a letter that the IRS sends to your employer insructing them to change your Form W-4 to the maximum withholding rates of "Single" with "0" dependents. This will significantly decrease your paycheck as a significant sum of your pay will be withheld and sent to the IRS.

The only manner to change the Form W-4 and employer's instructions to withhold at the maximum rate is to get permission from the IRS (the instructions are on the Letter 2080 sent by the IRS).

More importantly, if you get to the point of a lock-in letter, you most likely owe tax debt and need a professional to resolve your tax matters.

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