Perhaps you were convinced in my post earlier this week to adjust your tax withholding so that you can receive more money each month and avoid an income tax refund. Or, maybe you’ve been thinking about adjusting your withholding in the past few years and you’re not sure how, or just haven’t gotten around to it. Understandably, it can be a little bit confusing if you’re not familiar with the terminology or process.
According to the IRS, the amount of tax your employer withholds depends on a few things:
- The income you earn. The more income you earn, obviously, the higher your tax liability.
- The information you’re providing in the form you turn into your employer.
What is the W-4 form and the purpose of withholding allowances?
The W-4 is a form you complete for your employer that’s used to determine how much income tax to withhold from your paycheck.
The form collects three types of information according to the IRS: 1) whether or not you want to withhold money at the single or married rate; 2) the total amount of withholding allowances you want to claim; 3) any additional amount you would like withheld. The more withholding allowances you specify on the W-4, the fewer taxes withheld.
When to make changes to your withholding allowances
If you’re like our family, we’ve had a lot of life changes in recent years that have resulted in a need to modify our W-4. I think this may be typical for a young family. J
We’ve received some fairly large returns in the past and would rather have the extra money to manage towards our financial goals each month. So, after receiving some of these hefty income tax refunds we’ve submitted new W-4’s specifying an increased number of withholding allowances.
The IRS provides some guidance on when to update your W-4. Basically, as with our family, you’ll want to revisit your withholding allowances for major changes in life such as marital status, birth of a child or perhaps the purchase of a home. Also keep in mind, any changes related to exemptions, adjustments, deductions, or credits you become eligible for will require you to revisit your withholding allowances.
Your W-4 can be updated at any point in time through the tax year.
Adjusting your withholding allowances
[ad#In-Post Links]If you want an easy way to determine your allowances, you can use the IRS tax withholding calculator. The hardest part about the calculator is making sure you have the right information handy. So, here are a few tips the IRS provides before using the program:
- Have your most recent pay stubs handy.
- Have your most recent income tax return handy.
- Estimate values if necessary, remembering that the results can only be as accurate as the input you provide.
The calculator will take you through 5 different steps or pages requesting information. Again, as long as you have the information handy the process is quite easy and answering the questions shouldn’t take more than 10 minutes. For your convenience, I’ve provided a summary of each step below:
Step 1: General information is requested in this step. You’ll need to provide the filing status for your 2010 income tax return (married, single, etc.) and specify as to whether or not someone claim you as a dependent?
Step 2: Enter any child tax credits and other credits you’re eligible to receive.
Step 3: Enter income and withholding information. This is where you’ll need your pay stub to help you determine how much in taxes have already been withheld to date so that it’s not counted twice.
Step 4: Enter any adjustments to salary such as a contribution to an IRA or education loan interest you may be paying this year.
Step 5: Finally, enter any deductions. This is where you can enter your itemized deductions or select the standard deduction.
Based on all the information you submit, the calculator will tell you your anticipated income tax for 2010. The results will also tell you how much tax you’ll have withheld for the year and whether or not you’ll have an overpayment or if you will underpay your income taxes.
Now, here’s the best part. The calculator provides you direction as to how many allowances you should consider submitting on your W-4. With this information you can print off a new W-4 (see link below), complete the information (including your new amount of allowances) and submit to your employer’s human resources department.
This being said, keep in mind I’m not a tax professional. If you’re concerned at all you may over or under pay taxes (even after using the calculator), please consult with a tax professional!
Have you increased or decreased your withholding allowances in the past? What did you find helpful or confusing in this process you can share to help other readers?
Helpful links to help you adjust your witholding allowances
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