Whenever we get a job, we have that opportunity to fill out a federal and state piece of paper that we instruct on how much to withhold for taxes. A lot of us don’t really know what the numbers mean. We usually pick something that we know will withhold enough and then expect a huge refund at the end of the year. The best thing to do is to understand what withholding is and how to use it.
Stop Loaning The Government Your Money
As a society, we have become very dependent on receiving a tax refund. However, that is because we don’t understand what we are doing with our paychecks and withholding. If you have too much taken out for taxes, you get a refund at the end of the year. The problem is, you are loaning your hard-earned money to the government. You need that money now, not later! Your tax withholding should be enough to cover what you owe and the rest you get to keep immediately to put towards debt and house payments.
Is Withholding Allowance The Same As Dependents?
No, but they are sort of related. You indicate how many allowances you have and then your employer withholds taxes based on that number. The higher your allowances, the less tax you pay out. This is what scares people! Firstly, you should claim how many people are in your home. If it is just you and your partner, your allowance would be two. Add one for each child you and your partner have. The only real exception is when you are single and have no other persons in your home. In this case, it’s always best to claim zero until you have a mortgage and expenses that allow you to deduct rather than take a standard deduction. If you claim yourself and cannot file a longer tax form, the standard deduction usually leaves you owing taxes.
An important side note regarding state withholding: some states require you to put your withholding as zero no matter what. North Carolina is one such state and you are not required to make sure that your W4 (the federal form) matches.
Review Your Withholding After Each Tax Year
When you file your taxes and see what kind of refund you are getting, it’s time to look at your withholding. There are lots of reasons why you will get a larger refund than expected and each year that can fluctuate. It may be that you bought a house in 2018 and you were able to deduct enough to receive a bigger refund. Adjust your tax withholding for the tax year 2019 so that you receive more of your money but still pay your taxes.
It’s Not Better To Play It Safe And Pay Too Much
Even after reading this, someone is thinking, “ugh, it’s just easier to claim zero and be done with it”. You are right, it is easier. It’s just not safe to loan your money to the government and expect them to return it all back. Many people who adjust their W4’s after major changes find that they get to use that extra money towards their livelihood and retirement. There is no guarantee that you will get all your extra tax money back from the IRS.
Not sure what to do? Ask a professional! Many Certified Public Accountants offer a free assessment of your situation. If they tell you everything is fine, you have no further commitment. If they indicate that there can be better money management, hire them and use that help!