Think back to your last income tax return. Did you owe Uncle Sam a lot of money, or did he give you a big refund? Whatever your situation, you can influence next year's outcome by adjusting your payroll withholding.
Remember the IRS Form W-4, Employee's Withholding Allowance Certificate, your employer asked you to complete on your first day? "The number of personal allowances you designate on Form W-4 determines the amount of federal income tax withheld from each paycheck," explains TaxACT spokesperson Jessi Dolmage. "The total amount withheld for the year is credited against your income tax liability."
You can modify your withholding at any time of year by submitting a new Form W-4 to your employer. In order to minimize taxes owed at the time of filing, set your allowances to zero on your W-4. To increase take-home pay but potentially owe more money at tax time, increase your allowances.
Each of the following should be counted as one allowance:
If you have income from multiple jobs or your spouse works, withholding is usually the most accurate when counting all allowances on the W-4 for the highest paying job. Then claim zero allowances on W-4s for all other jobs.
Fortunately, there are free and easy solutions to help you calculate the appropriate withholding. The IRS offers Publication 505 and a withholding calculator at www.irs.gov.
TaxACT also offers a free withholding calculator. "After registering for TaxACT Free Federal Edition, click on the 'Next Year' tab to answer simple questions about your allowances," says Dolmage. "TaxACT will also complete a new Form W-4 that you can print and give to your employer."
Self-employed individuals should calculate net income and estimated taxes owed each quarter. Submit your quarterly estimated taxes along with Form 1040-ES, Estimated Tax for Individuals.
To adjust withholding for unemployment or social security payments, give Form W-4V to the payer. Submit Form W-4P to payers of pension, annuity and other deferred compensation.
In addition to reviewing your withholding when you get a new job, it's important to review your withholding whenever experiencing a major life change, such as:
If you live in an income-taxing state and want to adjust your state withholding, you'll need to complete the appropriate withholding form for your state.