Tax forms are a pain in the neck for most people. We fill them out to the best of our ability but still don’t understand all the intricacies of what they mean at tax filing time. Some people seem to pay even though they have done the right things. Well, there is always something else you can do.
Consider your W-4 form. That is the form your employer puts in your hand (among others) when you agree to come and work for them. This form is for withholding taxes. Withholding is the amount of taxes that are deducted from your check for Medicare, social security, federal, and state taxes. Everyone wants their pound of flesh.
However, there is a fine line between too little and too much. If you have too little withheld, the government will come down hard on you and ask for that money back come time to file your tax return. If you withhold too much, you will live hand to mouth all year to get a portion of that back at tax time. Either way doesn’t sound too appealing to me.
The good thing about W-4 forms is that you can change them as you see fit during the year. This is not a one-time deal. Things come up in all of our lives and we need a little more money coming in.
On the W-4 form, it asks for your withholding allowances. These allowances include your exemptions. Exemptions include dependents. You can claim an allowance for yourself, your spouse, and your dependents as long as no one else can claim them. However, just because you can take those allowances, doesn’t mean that you have to. You can claim an allowance for yourself and on one else to have more money withheld from your check.
Some married folks will have taxes taken out on their W-4 form at a single rate. This means that you will have twenty percent or more taken out each pay period. Also, an individual may specify if they want an additional amount withheld from their paycheck. By increasing your withholding you can almost guarantee that you will get a refund at tax time.
But why should the IRS be allowed to hold on to your hard-earned cash and gain interest on it during the year? You can keep it in your paycheck, put the extra dollars in an IRA or other investment vehicle and earn the interest yourself. If Uncle Sam does get anything, it will be at the end of the year and you will keep the interest.
If you are good at figuring taxes, you could try this handy tip. Claim all the exemptions that you are entitled to. Near the end of the year, say a month or two from the end, if you find that you haven’t paid quite enough to keep the IRS out of your pocket, change your W-4 form to reflect a single rate withholding (if you are married) or have extra money taken out to cover it. At tax time you will break even and owe nothing to the government.
A W-4 form can work in your favor if you know how to use it. Increasing your withholding is one way to avoid owing money to the IRS.