Setting up Tax Withholding

Do you look forward to receiving a big income tax refund every year? If so, you are taking the wrong approach with tax withholding.

You do not want that big of a return. That merely shows that the federal government took too much out of your paycheck every pay period. Think about it: The government was able to hold onto your money throughout the year, interest-free. Sure, you will get a refund at the end of the year. However, if the government had not withheld so much of your money, your regular paychecks would have been more significant.

You, then, would have had the opportunity to use that money during the year, whether you needed it to pay down your credit card debt or invest in the stock market.

The right goal? You would love to end the year without owing the federal government any money on your income taxes or having the government owe you any money through a refund.

That, of course, rarely happens. However, you can get closer to this ideal by making sure that the federal government takes the right amount of money from your paycheck.

Withholding

The IRS withholds a portion of each of your paychecks. However, you can change the amount of these withholdings quickly, just by filing a revised W-4 form with your employer.

The W-4 is the IRS form that employees fill out when they start working for a new company. By entering essential information into this form, you tell the federal government how much money to withhold from your regular paycheck.

Unfortunately, too many employees forget about this form even as their lives change. If you earn promotions and a more substantial paycheck, you should revise your W-4 form. If you get married or have children, you need to update your information. If you start your own business on the side, you need to rethink your W-4 form.

Here’s a handy rule: If you either owed much money to the IRS last year or received a big refund, you need to change the allowances on your W-4 form.

The Good News

Here’s the good news: You can rework your W-4 form at any time. Just request a new form from your company’s human-resources department.

Of course, deciding how much the IRS should withhold from your paycheck can be difficult. Fortunately, the IRS offers an online withholding calculator. This tool, which is a bit complicated, asks you a series of questions to help you determine the correct amount of money to have withheld from each paycheck.

Changing your W-4 form will require some research on your part. However, you will be glad come April 15. Remember, there’s no sound financial reason to overpay the federal government throughout the year. Keep your money where it belongs; with you.