Posted on January - 22 - 2010
Don’t Want to Give Interest Free Loans to the IRS? Update Your W-4 Form
Do you get a windfall federal tax refund each year? Wouldn’t you like to have say, half of that money during the course of the year for your disposal? Every time you receive a federal tax refund, you gave an interest-free loan to the government for one year. You can stop your charity to the IRS by updating your W-4 form.
You filled out a W-4 when you started your current job. The W-4 regulates how much money, your employer should withhold from each paycheck to cover your federal tax obligation. It should match the number of exemptions you plan to take each year on your 1040 tax return.
Most payroll personnel are not tax experts, so the most common instructions for W-4s given to new hires are “Just write all zeros” or “Just write down 1 in this box.” Here’s the problem: a zero or a one in this case means withhold the most from each paycheck, meaning that most people are paying too much in taxes on each paycheck.
Take a Trip to Your Human Resources Office Your human resources office or the personnel in charge of payroll are the folks who can help you update your W-4. The IRS allows you to do this at any other time of the year. However, due to the paperwork which must be done to make the changes, your company may only allow you to change deductions one time a year or at certain mile stones. Human Resources should know the policies.
Not all HR people know about payroll and taxes, especially at larger companies. If you meet with a blank stare after making your request to update your W-4, tell them you want to change your payroll deductions. You should be directed to someone who can help you.
How Many Deductions? A good rule of thumb: if you are married, especially if you have children, you should report one exemption for each family member. Report one less if you are concerned about owing money at the end of the year, or have a substantial source of income that is only taxed once you file. If you are expecting to claim lots of deductions at tax time, it’s perfectly fine to to add extra deductions. When would this happen? Let’s say you have a business on the side, your spouse is self employed or you are expecting substantial medical expenses.
The IRS has an online calculator you can use to estimate your withholdings. Type in your current information from your pay stub, a few estimations, and the IRS will show how much your federal withholding will be, an estimated tax obligation, and what to do for a smaller refund or to make sure your tax bill is covered.
My Tax Return is the Only Way I Can Save Money Is this you? If so, it’s a pretty common attitude. With a little effort, you can “withold taxes” from your paycheck the same as the IRS. Open up a savings account and have money transferred to it every pay period. This way you’ll have access to the funds whenever you need them AND you don’t have to wait for that refund check each spring. In addition, if you owe money at tax time, you can use the savings account to write the check to the IRS.
It’s time to close up your personal loan division by reducing your federal tax refund! Have any other ideas on how to manage deductions? Tell us about it by leaving a comment!
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