Tax time is a good time for each of us to review the amount which will be withheld by our employer for taxes.
Your financial situation may have changed. Did you buy a house, get married or have a baby? These changes could mean less withholding and more money for you in each paycheck. Did you start collecting Social Security and you're still working? This change could mean you need more withheld so you won't owe more in taxes.
Did you get back more than $500 from the IRS for your income tax return this year, or did you have to pay more than $500 in addition to what was withheld from your paycheck for taxes? The ideal is to have your withholding come as close as possible to your actual tax owed at the end of the year.
If you got back more than $500 for your income tax return this year, then you have been giving the federal government an interest free loan. You’d be better off adjusting your W-4 to decrease your withholdings so you get more in each paycheck and come closer to getting zero back for your tax return next year.
If you ended up having to pay more than $500 for income tax this year in addition to what you had withheld from your paycheck, then you can consider adjusting your W-4 to increase withholdings to get a little less in each paycheck so you come out closer to owing zero additional taxes next year.
So how do you begin in order to change your withholding to reduce your tax refund or the balance you had to pay? All you need is your most recent pay stub and your most recent income tax return.
Go online to the calculator at IRS.gov: http://www.irs.gov/individuals/article/0,,id=96196,00.html
You will be led through a series of questions to help you to determine your withholding. Use the results from the calculator to complete a new Form W-4 which you can then submit to your employer.
Doing this withholding review annually, as soon as possible after tax time, can give you more money to spend throughout the year or keep you from having to pay extra taxes next year.
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