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How to Decide on Your Tax Withholdings

When you earn income, you owe taxes: true for most of us. How much you pay in taxes is determined in part by how you fill out your W-4 form. Here’s a sample form—once you look at it, you’ll recognize it. You’ve filled one out for each job you’ve had. Your employer will deduct money for your owed taxes based on the number of allowances you claim on your W-4.

This is fine if you’re a standard taxpayer who files as a single person, has one job, and claims a standard deduction. But if you don’t fit into the standard category—and many of us don’t—it’s likely that you are having too much or too little tax withheld.

The trick is finding the spot where you don’t owe taxes at tax time, or get a big tax refund. Yes, it’s nice to get that big check in the spring, but when you have too much money withheld from your paycheck (resulting in your refund) you end up giving the government an interest-free loan. Wouldn’t you like to take home more money in each paycheck instead? And you certainly don’t want to be penalized by the IRS for owing too much tax at the end of the year (yes, they can do that!).

How do you know how many allowances to claim?

Worksheets come with the W-4, and they are kind of helpful. You can also get detailed and complicated instructions in the IRS’s publication 505. There’s also an IRS online withholding calculator—it might take some time to go through the questions, but it depends on which way is easiest for you to understand the information. The more allowances you claim, the less tax is withheld. Your easiest allowance is 1, for yourself. You also have the option of simply putting the total dollar amount you want deducted on Line 6/Additional Withholdings on your W-4.

Pay attention to your W-4 through the year

The solution is to pay attention to your W-4 both when you start your job, but also whenever you have a life change.

Several common life changes and events can change your tax liability. You’ll want to adjust your withholdings when any of these occur:

  • You get a second job
  • You get married
  • You get divorced
  • Your spouse gets a job
  • You and/or your spouse have a significant change in income (up or down)
  • You are unemployed part of the year
  • You have or adopt a baby or other dependent

It’s easy to make adjustments to your withholding allowances:

  • Calculate your new allowances by using one or more of the methods detailed above.
  • Tell your employer you need to change your withholding allowances, and ask for a new W-4
  • Fill it in with your new allowances. You can claim as many as are warranted by your specific situation.
  • Turn it in to your employer

You can adjust your W-4 any time you want during the year. Remember though, that adjustments made toward the end of the year will have less impact on your taxes for that year.

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