As you consider your tax liability this year, it’s a good idea to consider your withholding. When you decide how many exemptions to claim, and how much extra to have withheld from your paycheck, you should do so with consideration toward your needs and your financial situation.
Consider whether it might be time to adjust your tax withholding, and by how much you should change it.
Major Life Changes
One of the biggest reasons to adjust your tax withholding is due to major life changes. Some of the life changes that warrant an adjustment include marriage, divorce, the birth of a child, or the death of a dependent. All of these items change the exemptions you are entitled to and could make a difference in how much you owe in taxes. Adjusting your withholding to reflect these changes can help you increase your tax efficiency.
Large Tax Bill
Another issue can be a large tax bill. If you owe more than $1,000 in taxes, you might be penalized for not paying taxes as they are owed. If you are self-employed, and you make quarterly payments that reflect your income and taxes from the previous year, you can avoid penalties and interest. However, if you haven’t withheld enough, or if you have claimed too many exemptions, the situation needs to be remedied so that you can avoid penalties in the future.
While some think that a huge refund is a preferred outcome, others would rather have more money in their pockets each month. A large refund is an indication that you might have decided to withhold too much, or that you haven’t claimed enough exemptions. In any case, you have been providing the government with an interest-free loan for a good portion of the year.
Instead of letting the government use that money for free, you could invest that money for a return, or use it in some other way. Adjusting your withholding might mean a smaller one-time chunk of money as a tax refund, but it means more money in your pocket each month.
Adjust Your Withholding
If you are interested in deciding what withholding is appropriate for you, the IRS offers a withholding calculator, although it’s not overly helpful for someone who is self-employed. You can adjust your withholding by filling out a new W-4 form. Any company’s human resources department can help you acquire the proper form, and you will be able to change the number of exemptions you claim, as well as the extra dollar amount that you want to withhold.
It’s a good idea to consider your withholding each year as you assess your tax return. Think about the changes in your life and in your financial situation, and determine whether you would be better served have more or less withheld for taxes. It will change the size of your tax refund, and influence how much money you take home with each paycheck. Figure out the best option for your situation, and fill out your tax forms accordingly.