When your federal tax return is completed, you may discover that you’ll either receive a tax refund or owe money. If either of these amounts is substantial, it’s probably time for you to review your withholding election. If you owe a large amount of tax, you may need to increase the amount of taxes being withheld from each paycheck you receive. If you receive a large refund, you may choose to reduce the amount of taxes being withheld from your paychecks.
In both cases, your ultimate goal is to get as close to a zero balance as possible. If you find that you owe a large amount of tax, adjusting your Form W-4, Employee’s Withholding Allowance Certificate, for additional withholdings will mean a little less take-home pay in each paycheck, but will eliminate the need to pay taxes. And, if you receive a large refund, a reduction in the amount you have withheld will mean a little more take-home pay in each paycheck to help with day-to-day living expenses.
Examples of events that can have a significant impact on your tax liability and may require an adjustment to your withholding or the number of exemptions you claim on your Form W-4 include:
- A change in your marital status,
- A birth or death of a dependent or,
- An adoption.
Regardless of your reasons for choosing to review or change your withholding, the IRS provides an excellent interactive online tool to help you make the most informed decision. The IRS Withholding Calculator can help you decide what elections you should make on the Form W-4 that you provide to your employer. You’ll need timely information with regard to your income, current withholding, dependents and marital status.