If you’re like most Americans, the time to worry about taxes probably rolls around in March or April, when the dreaded Form 1040 due date draws near. For the better part of the year, you likely spend little time worrying about the logistics of how and when you’ll be filing. However, this could be a mistake. If you received a tax refund last April, it may be time to consider adjusting your tax withholdings.
How Withholding Works
Remember that W-4 you filled out when you first started your job? Maybe not, but nevertheless, this simple form dictates how much tax is withheld and, accordingly, how big or small (or nonexistent) your refund will be.
In addition to providing your name and Social Security Number to the IRS, your W-4 also allows you to choose a filing status – single, married, or married withholding at a higher single rate – as well as to claim a number of allowances. While seemingly arbitrary, this number is actually extremely important and is directly used to calculate how tax will be applied to your paycheck. As the Personal Allowances Worksheet dictates, one allowance should be taken for:
- Yourself, if no one can claim you as a dependent
- Yourself, if you are single and working just one job, married with a non-working spouse, or you and your spouse have a second income of $1,500 or less
- Your working spouse
- Any dependents
- A filing status of Head of Household
- Dependent or childcare expenses over $2,000
- The Childcare Tax Credit
This number of allowances is then translated into a dollar amount by your payroll department, thus reducing your wages based on the tax tables.
Why Refunds Matter
Despite the popularity of the tax refund concept, getting a refund is not actually a good thing. A refund isn’t free money from the government; instead, it’s just a repayment of your own earnings that were held interest-free by the government throughout the year. While this doesn’t seem like such a bad thing, your money could be growing and maturing in a savings account, CD, or brokerage account instead of lining the government’s coffers. By adjusting your withholdings, you can put more money in your pocket now instead of waiting until April to get it back in a lump sum.
When You Should be Adjusting Tax Withholdings
If you’re getting a refund or your employment situation shifts, you should be adjusting your number of claimed allowances accordingly to reduce taxes withheld. Adjust the number of allowances claimed if:
- You get a second job, including minimum wage or self-employment opportunities
- Your spouse gets a job or changes jobs
- You are unemployed for a portion of the year
- You get married or divorced
- You have a child, whether naturally or through adoption
Tax planning doesn’t have to be a burden. With Klein Hall CPAs, we’ll help you make income tax season easier than ever with assistance that includes both tax preparation and planning for the future. Get in touch today to learn more!