It’s April 16 and most of us survived another tax season. Were you happy with your refund or did you have to pay in more than you have in the past? If your refund was too big, or you had to pay in a lot, you may wish to revisit your Form W-4.
Every time you earn income, you’ll most likely owe state and federal income tax. Your Form W-4 determines how much tax is withheld from your paychecks. Your employer deducts taxes based on the number of allowances you claim on your W-4. This system works well if you’re a “standard” taxpayer who files single, has one job, and claims a standard deduction. But if you don’t fit into this category—and many of us don’t—it’s likely that you have too much or too little tax withheld.
Workers complete form W-4 when they start a job. For many people, that is the last time they pay attention to it. Has there been a change in your household – did you add a child, get married or have a divorce, change jobs or did your spouse get a job? Any of these changes may impact your tax status; that means reviewing your form W-4 is a good idea. In addition, changes in tax law may affect your ultimate tax bill; after passage of the most recent federal tax bill in late 2017, some workers consulted with the payroll office of their employer to review their allowances.
When you have too much money withheld from your paychecks, you end up giving Uncle Sam an interest-free loan (and getting a tax refund). Ask yourself if there are better ways to use that money. Why not take home more money in your weekly paycheck? Or invest the proceeds and earn interest on it? On the other hand, having too little withheld from your paycheck could mean an unexpected tax bill or even a penalty for underpayment. Either way, there’s a better way to manage your hard-earned money.
The key to having the right amount of tax withheld is to update your W-4 regularly. Do this whenever you have a major personal life change. For people who wish to avoid providing that interest free loan to the government, the goal is to file a tax return with zero refund and zero owed. While it is rare to get an actual zero as a result, these folks are generally happy if they either owe a small tax bill or receive a small tax refund. If you count on a big tax refund every year, you should also pay attention to your withholding, because how much you have withheld directly impacts your refund.
Is it time to call your employer’s payroll office?