Should you change your tax payments?

The new tax law cut 2003 tax rates for many taxpayers.  With lower tax rates, you may be wondering if you should change your tax withholding or quarterly tax estimates.  The answer depends on how you earn your income.

If you're an employee, the answer is usually no.  Your employer should automatically adjust the amount withheld from your paycheck starting no later than July.  The changes will be made based on new withholding tables recently released by the IRS.  If your circumstances have changed since the beginning of the year – you had a new baby, for example – you should file a new W-4 form with your employer to get your withholding closer to your actual tax liability for the year.

If you're self employed and make estimated tax payments, you may want to reduce those payments.  You'll need to estimate your income for the year, figure your tax under the new rates, and make sure you pay at least the required minimum.  Don't cut your estimates below what's required, or you'll be facing interest and penalty charges.

If you're an investor, the answer may depend on the nature of your investments.  If your investments are mainly in stocks or mutual funds, your tax bill will probably decrease.  That's because dividends and capital gains will enjoy new low tax rates.  But if your investments are bonds or bank CDs, the interest you earn will still be taxed at ordinary income rates.  You might benefit somewhat from the general drop in tax rates, but not to the extent of other investors.  In either case, it's worth figuring your likely tax under the new rules and making adjustments accordingly.