Angel's Advocate 

Adjust Your W-4 Withholdings

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This is a Angel's Advocate post.

Over two years ago, one of the first Devil’s Advocate posts I wrote was that you shouldn’t adjust with your payroll deductions. Back then, as it is now, conventional personal finance advice told you to adjust your withholding so that you don’t have too much tax withheld from your paycheck.

How do you adjust your withholdings? You adjust your withholding by submitting a W-4 to your company’s HR or payroll department with an updated number of exemptions. To determine how many exemptions you should put down, I would use the IRS Withholding Calculator because recent laws have made numerous “rules of thumb” obsolete.

Now that you know how, let’s talk about why!

Pay Off Debt

The immediate benefit of adjusting your withholding is that you’ll have more money in your paycheck. If you’re in debt, this new found money can give you a much needed boost in catching up and paying off that debt faster than you planned.

For example, if you have $10,000 in credit card debt at 17.50% APR, it would take you 5 years if you paid $302 a month towards the debt (with no other spending). If you were to increase that monthly payment by $40, you would be done in 4 years. If you were to increase it by $108, you cut it down to 3 years. Not only that, but by increasing your payment, you pay less overall interest over the life of the debt. So $40 a month doesn’t seem like a lot but if you put it towards your debts, it can have a fantastic effect.

Save the Difference

If you don’t have debt, treat the added cash as a bonus each month. You can take that cash and invest or save it. If you have savings goals you hope to accomplish, such as saving towards 529 plans or an emergency fund, then this extra cash can get you there faster than you expect. You can lock in some of the best CD rates with investments as small as $1 nowadays, which is a great way to earn a slightly better interest rate with zero capital risk. It might not seem like a lot but every little bit counts, especially nowadays.

Taxes Are Enough!

Finally, this is a philosophical reason but paying taxes is enough. I’m all for paying my way and fulfilling my obligations, I recognizes taxes are a necessary evil and that they help pay for the freedoms and liberties I enjoy, but I don’t really want to give the government an interest free loan too!

Do you adjust your withholdings? If so, why?

{ 20 comments, please add your thoughts now! }

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20 Responses to “Adjust Your W-4 Withholdings”

  1. Brandon says:

    I do my best to optimize my withholding, but last year, I still got back a $1700 refund. I think the main reason is that I had miscalculated the impact of the lifetime learning credit though. It turned out for the best though as we used it for our house downpayment (it would have went toward debt most likely otherwise which would have been essentially non-liquid).

  2. Money Beagle says:

    When I got married, the withholding went down a lot, automatically giving us more each month. I use a portion of that ‘extra income’ to fund my son’s 529 plan and the rest goes into our savings account specifically earmarked as ‘Tax Refund’. When our actual refund comes around, we combine the two and then divvy it up as to how we want to ‘spend it’. Typcially, a portion goes to pay down debt, a portion goes to saving for future car purchases, some to home repair and car repair funds, vacation funds, etc. But, we hold onto it throughout the year so that we have the flexibility to do what we need with it come tax refund time.

  3. yohbee says:

    In a weird way, getting a tax return is like being forced to “pay yourself first”. But instead of using planning and dicipline to accomplish this, you allow the government to put away some of your money and give it back to you at the end of the year.
    I go the cheaper route and try to adjust my withholdings to the point where I pay taxes at the end of the year.

  4. Patrick says:

    I adjusted my W-4 to get more money in my checks. It’s better for me since I get the money I would normally get in the Spring now. It’s great for me because I save the extra money I get anyways.

    • Charlie Thackston says:

      I have a job ana I show 4 exemptions. I want to change the number to 9 and get extra money in my check. Then I want to use the extra money to start a Home Based Business. Once I have the money to start my Home Based Business, I want to change my W-4 back to show 4 exemptions.

      Is there any problem doing this?

      I understand I will have to file a Schedule “C” and attach it to my 1040 form showing the income I earn with my Home Based Business and pay taxes on the earnings. Thanks for your reply.

  5. archie says:

    I have not found the IRS calculator to be very useful. Does anyone else have a better source for calculating the effects of student loans, mortgage, etc.?

  6. dilbert69 says:

    There are salaried and hourly paycheck calculators at They are free to use, and you can do infinite “what if” scenarios like “what if I changed my exemptions” or “what if I upped my 401k contribution” or even “what if I moved to a different state.”

  7. John says:

    Incidentally, I emailed a W4 to my employer a few minutes before reading this post. I setup high withholdings for the first six months of the year and now I’ve realized that I might be subject to a penalty. In the meantime I’ve been able to set aside enough for my Roth contributions for the year and have bolstered my emergency fund. In commemoration of the fourth it’s time to increase my patriotism!

  8. Kirk says:

    No matter what we try we always end up owing the state and getting a federal refund. This year, now that my wife is employed we started paying estimated taxes in addition my withholding, so we could also cover her FICA at the same time.

    I know I could have easily withheld her taxes from my paycheck, but we’ve never paid ES taxes before, so it’s basically an (non-too-pleasant) experience for us.

    According to my calculations at our current pace we should be on target if everything we set up at the beginning of the year remains the same. However it never remains the same, we always end up with more deductions than we originally planned for… also it doesn’t help that congress waits until the last possible moment to tell us what new deductions are included or excluded.

  9. No one’s mentions state tax refunds yet, but it’s even more crucial to avoid a refund here. Some states (Calif & I believe Kansas, at a minimum) delayed refunds this year. More states may go this rout going forward.

    A quick look at your states budget should tell you if yours could be one. States can’t print and borrow to pay obligations like the Fed can, so they’ll look for creative ways to conserve cash. Yesterday Calif announced it’ll be using vouchers. Better to owe a little on the state than to build up a big refund.

    On the Federal, I’d have to say I lean in favor of what Yohbee wrote, that having a refund is like paying yourself first (forced savings). For some reason we’re better at paying bills (including monthly credit cards) than at putting money into an emergency fund. Having it arrive in the mail may be the best way for a lot of people. Then you have a choice to put it into savings or to pay down or payoff a credit card, which some how is more gratifying than paying it off over time.

  10. archie says:

    dilbert69: Thanks! I had used their payroll calculator in the past (once I figured out how it worked in VA it is accurate to the penny!!) but had not realized that they had a W-4 calculator as well…

  11. Brian says:

    I have almost no taxes withheld at one of my part time jobs. Being new in the workforce, and not knowing how much my gross income will be, let alone my AGI, it is best to just take the money out, and throw $100 a month into a high yield savings account.

    Maybe i will owe $500, maybe i will owe $2000. With so many part time jobs and each being so flexible, i would rather have the cash now and pay it later.

  12. Damon Day says:

    This is an excellent idea. This is one of the first places I have my clients look for money for a debt repayment strategy. I always ask about their refunds from the IRS and it is usually several thousand dollars. So it is a no brainer way to get immediate monthly cash to help pay down debt.

    Also in response to Kevin’s comment about the states not able to print and borrow money like the feds. I believe California has created a loophole. As you mentioned they are issuing IOU’s instead of money. I have also read that B of A has agreed to honor the IOU’s. Well, haven’t we given B of A billions of taxpayer dollars?

    Hmm, so the front door was locked, lets try the back door. The whole thing is a scam. Nobody learned anything. California is getting a bailout by doing an end run.

    The other thing I heard yesterday was that State employees cannot be paid with the IOU’s. So the people responsible for this mess are still getting paid. Great system!

    • dilbert69 says:

      As a 26-year Californian, I feel I must reply. First of all, any state can borrow if it can issue bonds that someone will buy. Second, IOUs are not the same as printing money, because they actually have to be repaid with real money at a later date. California cannot increase the amount of money in circulation the way a central bank can. Finally, while a number of states have a 2/3 requirement for tax increases and a number of states have a 2/3 requirement for budget approval, California is the only state that has both. And they are completely unlinked, so the state spends a lot of money in boom times (which is politically popular) and never raises income and property taxes even in hard times (which is politically unpopular). They did raise the sales tax a full point recently. In my county, Alameda, it’s a whopping 9.75%. Naturally, this has a disproportionate impact on the poorest people, who spend all their income (and more), and who are less likely than wealthier people to vote (or to be US citizens, for that matter). Only by modifying the state constitution to link spending to budgeting and enable approval by a simple majority of both houses of the legislature (with the governor’s signature), like any other law, will solve the problem. It’s a long, uphill battle, but I think it’s coming. And to those of you who think California is irrelevant, I hope you won’t mind doing without our wine, iPhones, seafood, vegetables, and fruit, to name just a few of the things that we produce and that the rest of the world enjoys. Thank you for your time.

  13. Damon Day–Brilliant observation! I stand corrected, they can borrow and print.

    Actually, that’s what the IOUs are anyway, so what was I thinking??? Still I’d zero out state withholding just to be on the safe side.

    • Damon Day says:

      absolutely agreed. Much like an alcoholic, these idiots in congress will never change their behavior until we stage an intervention and force them into rehab by taking their drink away. Sure it won’t be fun for them, and will be painful, but in the end, if we don’t stage an intervention and send them to rehab, we are all doomed.

  14. I agree with adjusting– never give the government an interest free loan!

  15. Dave M. says:

    I haven’t seen anybody mention this, so I will…

    You need to be careful adjusting your withholding, because if you don’t have enough withheld through the year you may be subject to penalties which would more than negate any benefits you would get.

    But maybe those penalties are what Jim was referring to by “recent laws have made numerous “rules of thumb” obsolete.” Do you have any clarification on this for us, Jim?

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