Do you struggle to pay your taxes in April? Or, do you have the money, but hate waiting until your forms are filled out before you know how much you'll have to pay? Many people don't realize that it is fully within their control to determine how much they will owe or how much of a refund they will receive at tax time.
TUTORIAL: Investing 101
The way you fill out the W-4 form that you turn in to your employer determines how much tax you will have withheld from each paycheck, which determines how much you will ultimately owe or be refunded in April. What you may not know is that it's possible to submit a new W-4 form to your employer whenever you want - it's not a one-time thing that you do when you first get the job. (For more on income taxes, see our Income Tax special feature.)
If you don't want to owe anything, but you also don't want to overpay taxes and give an interest-free loan to Uncle Sam, read on to find out how to get your tax bill or refund closer to zero before tax times approaches.
- Online Paycheck Calculator
IRS's Tax Withholding Calculator
The tax withholding calculator can be found on the Internal Revenue Service website. This calculator is particularly useful for people with more complex tax situations. It will ask about factors like your eligibility for child and dependent care tax credits. how much you have contributed to a tax-deferred retirement plan or health savings account (HSA) and how much federal tax you had withheld from your last paycheck. Based on the answers to your questions, it will tell you how much federal tax it expects you to owe at the end of the year, what you have paid so far and how much you will owe or be refunded. (To read more about these credits, see Give Your Taxes Some Credit .)
If you have tax software or know how to fill out a 1040 form yourself, you can fill out a sample tax return. This will give you the most accurate picture of your end-of-year tax liability. The only thing that can make it inaccurate is that you will most likely be using last year's tax software or last year's 1040. However, if you want to do a little online research, you can usually find out what things have changed from the previous year, such as the new standard deduction amount. Filling out a sample return is also ideal for people who itemize deductions. such as homeowners or those who are self-employed. (Mastering these fundamentals now will take the stress out of tax season. Read more in Next Season, File Taxes On Your Own .)
Determine Your Tax Withholding
Once you know the total amount you will owe in federal taxes, you'll need to figure out how much you need to have withheld per pay period to get to that total by December 31.
If you haven't received any paychecks or pay stubs yet, just divide your total tax liability for the year by the number of paychecks you receive. Then, compare that amount to the amount that is withheld from your first paycheck of the year.
- If not enough tax is being withheld, the easiest way to fix the problem is to
fill out a new W-4. On line 6, which says "additional amount, if any, you want withheld from each paycheck," fill out the difference between what you should be paying each pay period and what you're actually paying. You could also decrease the number of allowances you claim, but the results won't be quite as accurate. And, you don't have to wait for your employer's HR department to hand you a new W-4 form - just print it out yourself from the IRS's website. (For more ways to fill out your W-4 for deductions, read Payroll Deductions Pay Off .)
- If you've overpaying, and you want to get some of that extra money back each pay period try increasing the number of allowances you claim. It won't match the worksheet, but that doesn't matter. You can claim seven allowances even if the W-4 worksheet suggests you should only claim two, as long as you'll have paid at least 90% of your federal tax liability by December 31. (If you underpay, you'll owe penalties and interest.)
If it's not the beginning of the year, you'll need to compensate for all the previous pay periods when you were over or underpaying your federal tax by filling out a new W-4 to adjust your withheld amount up or down for the rest of the year. Then, the following January, you'll need to fill out a new W-4 again, or else your amounts will be off for the New Year. (Finding out that you owe money when you were expecting a refund is a nasty shock. If this happened to you, read how to bounce back in Top 9 Solutions To An Unexpected Tax Bill .)
Remember, if you're self-employed, have fluctuating income because you're an hourly or seasonal worker, have multiple jobs or itemize your deductions, things get considerably more complicated. You probably won't be able to make sure you owe nothing on your taxes with 100% accuracy, because your income and expenses will change throughout the year, but following these steps may help you get closer to a reasonable number. You can always redo the calculations described above two or three times a year as your income picture evolves. (For more on how itemized deductions can impact your taxes, read An Overview Of Itemized Deductions .)
It sometimes takes considerable effort to figure out what amount you should really have withheld from each paycheck, especially if it's not the beginning of the year. However, a couple of hours now can either increase your monthly cash flow for the rest of the year or save you from an unexpected bill at tax time.
Read about why having money now is more valuable than having the same money in the future in Understanding The Time Value Of Money .
Category: Personal Finance