The Real Reason to Adjust Your Tax Withholding

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Tax photos why you should change withholding
Cassandra Hubbart, DailyFinance

(Updated: April 23, 2013)

With tax refunds arriving around the country, we're all hearing the annual chorus of financial advice telling you why getting a refund is actually a bad thing. But even though changing your withholding to get your money back faster may not be all that important right now, it can be very important if your family situation has changed.

The conventional wisdom on why big refunds are bad is that they mean that you've let Uncle Sam hang onto your money all year interest-free. Instead of having it squirreled away all year, you could have been spending that money throughout 2012.

But at least right now, letting the government have that interest-free loan isn't a big deal. That's because banks aren't paying you much interest on your money anyway. So if having too much taken out of your paycheck helps you gather up a savings nest-egg in the form of your tax refund, that could end up being better than just spending a few extra bucks every week.

When You Must Change Withholding

On the other hand, sometimes you really need to change your withholding. The most common case is when you get married or divorced, or have a child. For one-earner couples, if you get divorced, the wage-earning spouse will usually see a big increase in taxes. If you don't change your withholding, you won't have enough tax taken out -- opening yourself up to penalties and interest.

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Marriage can bring some two-earner couples a bigger tax bill than they paid in total when they were single. Again, that can turn what was a refund into a year-end tax bill if you don't make any changes to your withholding.

Finally, having children can have an impact on your withholding. Because of personal exemptions and child tax credits, you may owe less in tax after having a child, giving you an opportunity to have less withheld. But if a stay-at-home parent returns to the workforce, it can create the same two-earner tax problems that married working couples face.

What to Do

If you're not sure about your withholding, you can always go to your HR department for guidance. They'll tell you how to fill out Form W-4 to make sure your withholding gets done right -- and works the way you want it to.

And in the meantime, if you got one, enjoy your refund!

For more tax info, visit the DailyFinance Tax Center

10 Weird Tax Laws
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The Real Reason to Adjust Your Tax Withholding

The Centennial State eliminated the tax exemption for non-essential food items and packaging that can come with your food or beverage purchased at your local eatery or convenience store. Sales and purchases of nonessential food items and packaging provided with purchased food and beverage items are taxable at the state sales and use tax rate of 2.9%.

So while cups are considered essential, cup lids are not and, hence, are taxable. French fry sleeves are not taxable but expect to pay sales tax on napkins and towelettes.

When Halloween comes around, Indiana residents may be better off buying a pre-made costume. Indiana's Department of Revenue decided that sales tax could be applied to labor and design of custom-made costumes due to existing law about "retail unitary transactions." In other words, a combined sale of tangible personal property and services becomes taxable when the services are performed before the transfer of the property.
Under federal statutes, state or local governments can't taxes airlines and airport users. But in Kansas, taxes can be imposed on "any place providing amusement, entertainment or recreation services."  The state's Department of Revenue concluded that the sales tax could be applied to tethered hot air balloon rides only.
A sweet tooth in the Bluegrass State can get expensive. Candy that does not contain flour faces a sales tax, while candy with flour is exempt. Hence, residents hankering for chocolate-covered almonds will pay a little more than those buying chocolate covered pretzels.

After an uproar about how non-residents could buy boats and repair parts tax-free if they moved their boats out of state within 30 days of purchase and kept them out, Augusta lawmakers amended the law.

Non-residents have to pay 40% of the sales tax if they brought their boats back into the state or kept them in Maine for more than 30 days. Residents, however, remain out of luck: they must pay the full sales tax on the sticker price of the boat and repair parts.

For many families, a haunted house visit during Halloween is a tradition. But beware: The Empire State requires visitors to pay a sales tax in order to be spooked.
Ask a New Yorker what are the best bagels in the city and you'll get some impassioned answers. Just be careful where you eat it. Once a bagel shop staff slices that bagel, it's considered prepared food even if you don't ask for a schmear of cream cheese and is subject to sales tax. As a result, bagel lovers can end up paying some 8-to 9-cents extra per bagel.
Fashionable Texans are paying more for certain items of clothing these days. Buy a belt and it's tax-free. But shop for a belt buckle and expect to pay a sales tax. Cowboy boots and hiking boots are exempt, but rubber boots and climbing boots are taxable.
Before October 2009, ice cream cakes were taxable only when sold for consumption at the store or ice cream shop. Once the state became a member of Streamlined Sales and Use Tax Agreement, ice cream cakes and bars in which the retailer mixes ice cream and at least one other food item together becomes "prepared food" and is taxed. Yet, if it is made by someone other than the retailer, it's not taxable unless it is considered a prepared food because, for example, it came with utensils or napkins.

In the 1960s Washington added a retail sales tax that would be charged at any business that offers customers the "opportunity" to dance. According to ABC News, many Washington businesses complain of arbitrary enforcement of the statute. The state legislature is considering a repeal.

Proponents of the repeal say enforcement targets medium-sized venues or taverns, and not places like sports stadiums that often host concerts where people dance. Recently, Century Ballroom in Seattle and was hit with $250,000 bill on back taxes for not adhering to the law.


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