One of the biggest fears people face during tax season is the possibility that they will owe money to the Internal Revenue Service. Our stress levels rise significantly at the thought of owing more in taxes than we can possibly pay. The IRS has become an entity to be feared. This is the reason why so many people are elated when they discover they will actually receive money from the IRS (refund) rather than owe money to the IRS.
Unfortunately, receiving a large refund is not the smartest option for your money. The refund money you receive is money that you earned throughout the previous year. The IRS isn’t giving you a gift in the form of a refund check. No, they are simply giving you back your own money. This is money that you “loaned” to the IRS throughout the previous year and now they are repaying that loan without adding any interest. What a great deal….for the IRS. I’ll bet you would have a hard time finding a total stranger to lend you money without expecting interest in return.
While it is your civic duty to pay taxes, it isn’t your duty to pay more than required by law. Therefore, if you receive a large refund each year you should consider reducing the amount of taxes that are taken from your paycheck. This is a very simple process that can be achieved by visiting your Human Resource office and completing a new W4. Changes made on the W4 will be reflected by the amount of taxes withheld from your paycheck.
The W4 allows you to calculate the number of allowances you are claiming. This is not the same as the number of dependents you claim on your tax return. You can claim any number of allowances (despite the actual number of dependents) as long as the ultimate amount of taxes withheld from your check is adequate.
Determine How Much Less You Should Have Withheld
Let’s say you are currently claiming two allowances, you are paid monthly, and you will receive a $2400 refund this year. If you had paid $200 less a month in taxes you would have broke even with the IRS (meaning you would not owe them anything and they would not owe you anything).
Determine How Many Allowances You Should Claim
Claiming additional allowances will decrease the amount of money taken from your check. In order to help you determine how many allowances you should claim, use the IRS Withholding Calculator. Determine how much less will be withheld from your check based on the change in allowances. Compare this amount to the amount of your refund and to the monthly reduction amount in taxes that you calculated previously (above paragraph).
Too Much of a Good Thing
Don’t overdo the amount of taxes withheld from your check. You don’t want to place yourself in a position of owing a large amount of taxes. Underpaying your taxes could cause you to face penalties. If you are uncomfortable calculating the number of allowances you should claim, seek the advice of an Accountant.
Life Changes that Cause You to Change Your Withholding
Life changes can cause you to have too little tax or too much tax taken from your paycheck. When the following life changes occur, you should re-calculate your allowances in order to change the amount of taxes you pay:
- Getting Married
- Getting Divorced
- Buying a Home
- Having a Baby
- Change in the Number of Exemptions
- Death of a Spouse
- Change in Income
Take control of your hard earned money and don’t let the IRS borrow money that doesn’t belong to them. Your duty to pay taxes doesn’t mean that you have to be so intimidated by the IRS that you are willing to lend them money interest free. Instead, take control of your finances by managing the amount of taxes withheld from your paycheck.
