Update Your W-4
The first place to check to make sure you're not underpaying or overpaying on your taxes is the W-4 you have filed with your employer. The rule generally goes that the fewer allowances you claim, the more money will be withheld—or taken out of—your paycheck and sent to the IRS towards your taxes. If you find that you're paying way too much in taxes and get a huge refund every year, you may want to update your W-4 to claim an allowance or two. If you're severely underpaying your taxes, it may be time to take fewer allowances. Keep in mind that claiming "exempt" isn't the same as taking no exemptions—"exempt" only applies to people whose taxable income is below the taxable level. While it's true that for most people, claiming 1 or 0 allowances will result in a tax refund and claiming 2 or more will result in either breaking even or owing no taxes at all, the truth is a bit more complicated and depends on your situation. Photo by Lane V. Erickson (Shutterstock).
For example, if you work multiple jobs, you should make sure to claim zero allowances at your second job, or you may wind up overpaying on your taxes. However, if you work a full-time job and have cash side-income, you'll want to make sure you either withhold additional money from your primary paycheck to compensate for the added income, or you'll want to look into quarterly estimated tax payments (more on this later.) There's a guide to adjusting your tax withholding at About.com that breaks down the process well. For most people, the first step is to take a look at the W-4 you have on file, and if you wind up getting too much back, adding an allowance or two, and if you wind up paying too much, reducing your allowances or telling your employer you'd like an extra dollar amount withheld for taxes.
Make Sure You're Getting All of Your Deductions
If your issue is that you find yourself owing too much money when you file your taxes, make sure you're claiming all of your deductions. You may be surprised the number of things you can legitimately claim on your taxes, especially if you have a side business, do
some freelancing, or run a business out of your own home. We've mentioned some of them in the past. but also pointed out that you shouldn't get caught up in them especially if you're spending money just to make a deduction.
The FreelanceSwitch blog offers up a list of tax deductions anyone who does any work on their own… Read more Read more
Still, keep close eye on your business expenses, and your personal expenses that can be attributed to your job and money you've spent that turned out to be more for your work than for yourself. Also don't forget to deduct your charitable donations—even that pile of old gadgets and gear in your garage or that stack of old books that you donated to Goodwill qualifies as a tax deduction. Photo by Alan Cleaver .
See a Tax Professional or Hire an Accountant
If the ambiguity of a change here or there doesn't console you much, it's time to talk to a professional. Most of the easy adjustments are trial and error. Tweak, see how it changes things, wait for next year to see if you break even—it's a little hit or miss. If you want more precision, you can do the W-4 worksheet and a projected tax payment to see how your taxes for next year will shape up based on your change, but the paperwork can be confusing, and there's no guarantee you did it correctly.
For the best possible answer, you're better off spending some money and hiring a qualified tax professional—even if it's from a chain like H&R Block—to help you look over your previous year's taxes, compensate for any life changes you may be in for, like moving to a new state or changing jobs, and then seeing how best to adjust your W-4 to make sure you break even as closely as possible. We've discussed how you can find a good tax professional. If your finances are complex and you're staring some uncomfortable numbers in the face, it's time to find someone who can help you at least make sense of them. An accountant or other tax professional can at least help you understand them and make changes so next year looks better. Photo by Michael Gil .