How Do I Adjust My Tax Withholding?
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The federal income tax is a pay-as-you-go tax. This means you must pay the tax as you earn or receive income during the year.
As a wage earner, you pay federal income tax by having it withheld from your pay during the year. This is your withholding. Your withholding is based on the number of allowances you claim when you file Form W-4, Employee's Withholding Allowance Certificate, with your employer.
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Purpose of This Publication
The purpose of this publication is to help you check your withholding and, if necessary, prepare Form W-4 to adjust your withholding. When you first begin a job, you must complete a Form W-4 and give it to your employer to establish your initial withholding. You can adjust your withholding by filing a new Form W-4 with your employer at any time.
Note: You do not have to file Form W-4 each year unless you need to adjust your withholding.
Checking Your Withholding
The purpose of this section is to explain why, when, and how to check your withholding to see if you will have enough, but not too much, tax withheld for 2003.
Why Should I Check My Withholding?
You should try to have your withholding match your actual tax liability. If not enough tax is withheld, you will owe tax at the end of the year and may have to pay interest and a penalty. If too much tax is withheld, you will lose the use of that money until you get your refund.
You should check your withholding if there are personal or financial changes in your life or changes in the law that might change your tax liability. See Figure 1.
When Should I Check My Withholding?
The earlier in the year you check your withholding, the easier it is to get the right amount of tax withheld.You may want to check your withholding when any of the following situations occur.
- You receive a paycheck stub (statement) covering a full pay period in 2003, showing tax withheld based on 2003 tax rates.
- You prepare your 2002 tax return and get a:
- Big refund, or
- Balance due that is:
- More than you can comfortably pay, or
- Subject to a penalty.
- There are changes in your life or financial situation that affect your tax liability. See Figure 1.
- There are changes in the tax law that affect your tax liability. See Tax Law Changes, later.
Caution: You must give your employer a new Form W-4 to adjust your withholding within
10 days of any event that decreases the number of withholding allowances you can claim, such as your divorce if you are claiming married status.
Tax Law Changes
If there are tax law changes that increase your tax for 2003 and you do not increase your withholding, you may have to pay tax when you file your return. If there are changes that decrease your tax for 2003 and you do not decrease your withholding, you may get a larger refund. You can get this money back earlier by reducing your withholding.
For information about changes in the law for 2002 and 2003, get Publication 553, Highlights of 2002 Tax Changes, or visit the IRS Web Site at www.irs.gov.
How Do I Check My Withholding?
You can use the worksheets and tables in this publication to see if you are having the right amount of tax withheld.Follow these steps.
- Fill out Worksheet 1 to project your total federal income tax liability for 2003.
- Fill out Worksheet 2 to project your total federal withholding for 2003 and to compare your projected tax to your projected withholding.
If you are not having enough tax withheld, Worksheet 2 will show you how much more to have withheld each payday.
If you are having more tax withheld than you need to have withheld, Worksheet 2 will refer you to How Do I Decrease My Withholding.
What If Not Enough Tax Is Being Withheld?
If not enough tax will be withheld, you should give your employer a Form W-4 showing either a reduced number of withholding allowances or an additional amount to be withheld from your pay. See How Do I Increase My Withholding, later.There is a good chance you are not having enough tax withheld if:
- You have more than one job at a time,
- Your spouse also works,
- You have income not subject to withholding, such as capital gains, rental income, interest, and dividends, or
- You owe other taxes such as self-employment tax or household employment taxes.
If your employer cannot withhold enough additional tax from your pay, you may need to make estimated tax payments. This might be the case if your pay is low and you have substantial nonwage income, such as interest, dividends, capital gains, or earnings from self-employment. For more information on estimated tax, get Publication 505, Tax Withholding and Estimated Tax.
What If Too Much Tax Is Being Withheld?
If too much tax is withheld, you may receive a large refund when you file your return. If you would prefer to receive the money during the year, you may be able to decrease your withholding by giving your employer a new Form W-4.There is a good chance you are having too much tax withheld if:
- You got a big refund for 2002 and your income, adjustments, deductions, and credits will remain about the same this year,
- Your income will remain about the same as last year, but your adjustments, deductions, or credits will increase significantly, or
- You got a refund last year; your income, adjustments, and deductions will remain about the same as last year; but you will qualify for one or more tax credits this year that you did not qualify for last year.
Note. Adjustments to income are listed on Form 1040 and Form 1040A near the bottom of page 1. Itemized deductions appear on Schedule A (Form 1040). Credits appear on page 2 of Form 1040 and Form 1040A. See also Figures 1 and 2.
You may want to check your withholding after events in your life that are likely to affect your tax liability. Examples are listed below.
Figure 1. Personal and Financial Factors