By Tom Breedlove, HomePay by Breedlove
We’re at the midway point of the tax season. Many of you have already filed your personal income tax return and the rest are “finalizing paperwork,” which is usually code for procrastinating. For what it’s worth, you can put me in the second group for right now, but it’ll all get done before the April 15th deadline.
Obviously the thing people are paying attention to the most when they file is whether they’ll get a refund from the IRS or not. No one wants to have a tax bill, but some people may be unhappy with their refund if it’s less than they expected or if it’s significantly higher than anticipated. So what can you do in this situation?
An easy way to get closer to your desired income tax refund is to change up how you fill out your Form W-4. This is the form you filled out when you were hired that tells your employer how much federal income tax to withhold from your paychecks. The more allowances you take, the less in income taxes that are withheld and vice versa. Throughout the year, the taxes are paid to the IRS and at the end of the year, the IRS calculates whether you paid too much in taxes or too little.
So let’s say you owed the IRS $300 this year and don’t want to have a tax bill next year. You should decrease the number of allowances on your W-4 (i.e. from 2 allowances to 1 allowance or from 1 allowance to 0 allowances). Doing this will decrease your take-home pay slightly each pay period, but the extra taxes you pay will ensure you don’t owe anything at tax time next year. In fact, you’ll probably get a refund.
Now, let’s assume you’re on the opposite end of the spectrum and got a $1,500 tax refund. That’s nice, but maybe you want access to that money throughout the year. If so, you should increase the number of allowances on your W-4 so you take home more each pay period and receive a smaller refund next year.
Note: Everyone’s tax liability is different and many factors go into calculating it. If you’ve had several major events in your life this year, such as purchasing a home, having a child, moving to a new state, etc., it could significantly impact your taxes. It’s best to adjust your income tax withholdings when you’re in a stable environment with as few outside factors as possible.
If you decide to make changes to your Form W-4, feel free to download a copy from our website here. Additionally, you can run pay scenarios with our free Employee Paycheck Calculator to see how altering your withholding allowances will affect your paycheck. If you or the family you work for has any questions about income tax withholdings, please reach out to us. We’re here to help!