Most of you probably already know that getting a large tax refund is not actually a good thing. If you don’t know why, check this out. However, I am pretty sure everyone knows that owing a huge amount of money on April 15th at the tax deadline is a miserable feeling as well. For many people, a huge tax liability at the end of the year can mean that they don’t have enough cash on hand to pay their tax bill in full. Click here to see what to do if that applies to you. The best thing you can do if you are self-employed is to make your estimated tax payments throughout the year based on the amount of income you expect to have. You can consult a CPA for these estimates or you can calculate your tax liability based on tax brackets and form for the current year. However, if you are not self-employed, the best way to make sure you have the right amount of tax withheld is to adjust your W-4.
Many people don’t know what this form is exactly; they just know they fill it out when they start their job and then probably never see it again. Your W-4 is not to be confused with your W-2. Your W-4 is the form your employer gives you at the beginning of each year to determine how much federal withholding you want taken out of your paycheck each pay period. On this form, you enter a number representing how many people you will be claiming on your tax return. If you put a “0” you will have a very high withholding. If you are not married and you have no children, you can generally enter a “1” for one exemption. This will usually get you to the withholding closest to your tax liability. If you are married and have children, your spouse and you should fill out your W-4s together. You need to know how many exemptions each person is claiming so you do not double up and have too much withholding. For instance, there is a line on your W-4 where you can enter a “1” to claim your spouse as well as yourself. However, If your spouse claims his or her own exemption on the W-4, then your withholding will be incorrect when it comes time to file your tax return. I would advise that each spouse claim themselves only and not each other. If you have children, you should discuss which person should claim that child on the W-4 for the year so your combined withholding is accurate.
If you normally itemize your deductions on your tax return, or you are buying a house a during the year and taking out a mortgage which may cause you to itemize if you didn’t used to, then you can use page 2 of the W-4. Page 2 allows you to enter your projected itemized deductions which may also alter your withholding that you should have taken out of your paycheck. Page 2 also offers a worksheet that you can use to determine your withholding if you and your spouse both have jobs, or if you work multiple jobs.
In case you didn’t know, you can also change your withholding any time throughout the year by filling out a new W-4. If you get married (which will change your filing status and combined income), or you have a baby (which will change your exemptions) you may want to change your withholding to account for the change in your tax liability at the end of the year due to these events. You can simply print out a W-4 online and submit it to your employer, or you can request a new form from your employer. Once you submit it, you new withholding amount should be applied to your next pay period.
You can also use the IRS W-4 calculator to decide whether the number of exemptions you currently claim on your W-4 will produce too high or too low of a withholding. You can use this calculator throughout the year to check your withholding and alter your W-4 accordingly.
It is key to keep updating your W-4 throughout the year to coincide with major life events. This way you can give less of your money to the government, interest free, and not have such a large tax due come April 15th. Keep this in mind when filling out your W-4, and leave your questions below!