Do You Need to Adjust Your Tax Withholding?

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taxesWhen you work as an employee, taxes are withheld from your paycheck. Your withholding is based on how many exemptions you claim, as well as wether or not you request that an extra amount of money be withheld from your paycheck for the government.

Most of the time, you fill out your W-4 paperwork when you start working at your job, and the information carries through for as long as you are employed with the company. However, it’s a good idea to occasionally consider your tax withholding and determine whether or not you need to make an adjustment.

Do You Owe Too Much?

If your tax bill is more than you expected — much more — that could be an indication that you aren’t withholding enough from your paycheck. Maybe you are claiming too many exemptions. Or, perhaps, you need to increase the extra withholding you are taking. In any cases, there are circumstances in which owing too much can trigger a penalty, making tax time even more expensive.

My husband is a W-2 employee, and we have used a high extra tax withholding from his paycheck as a way to offset my income as someone who is self-employed (I also pay quarterly taxes). We owe money each year, but it’s not an unmanageable amount. If you find yourself repeatedly owing more than you expect, it could be time to adjust your tax withholding.

Did You Get a Massive Refund?

It’s nice to get a huge tax refund. A big chunk of money feels good in the bank account. However, too many people view a tax refund as a windfall. For the most part, a tax refund is no such thing. This is money the government owes to you. A big refund means that you have giving the government an interest-free loan, instead of putting the money to work for you.

In some cases, such as refunds due mostly to tax credits, a refund is expected. However, if your refund is mostly due to your tax withholding, perhaps you should reconsider. Unless you can’t save money effectively on your own, without “forced savings,” there is no reason to let the government use money that you could be earning interest on throughout the year.

Is Something Different in Your Life Circumstances?

Another reason to change your tax withholding is a major change in your life circumstances. If you’ve added a new dependent, you can increase your exemptions. If you have married, or divorced, or experienced some other life change, you might need to fill out a new W-4 so that you can adjust your tax withholding. Also, consider changes to where you get your income. If investment income or side business income is on the rise — or falling — what you withhold from your “regular” job might change.

Carefully consider your situation, and your tax withholding. Make changes as necessary so that your tax bill or refund is more reasonable. A great goal is to try and get as close to zero as possible. That way, you don’t owe very much — and you know your money is being put to use directly on your behalf.

(Photo: bsdfm)

{ 4 comments, please add your thoughts now! }

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4 Responses to “Do You Need to Adjust Your Tax Withholding?”

  1. David M says:

    I always get a tax refund and I’m happy about this!

    My wife works for herself but I do not want to do quartly taxes – thus I have extra taken out of my paycheck. I’m to lazy to figure out how much extra I should take out so I go BIG and thus I get a big return every year.

    To me this is a good trade off – not doing quarterly tax payments and letting the government use my money all year tax free.

  2. Being mostly self employed, the hard part is sending money to the IRS in estimated taxes before the IRS comes calling. I know, there are quarterly due dates, but I still don’t like giving Unc Sam my money early…

  3. I like that you point out how some people think of a tax refund as a windfall. If you are this type of person, you should withhold the right amount or over withhold.

    Personally, I under withhold because I want the government to help me save. The best way to save is with automatic deductions from your paycheck. If the money isn’t there you can’t spend it. I’m not worried about giving the government an interest free loan. Come on now, I bet half the people that say that don’t even have a high yield savings account like Ally or ING. For Ex. 1% of a $4,000 refund is $40.

    • Why would you say you want the government to help you save? Why not just setup the automatic withdrawal from your checking into a saving account on your own? Even if it is just to earn $40, that is still $40 for doing nothing more than changing your deductions.

      I guess it’s a “whatever works for you” kind of thing, but I’m just saying you can do the very same thing on your own, but with better results.

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