Update Tax Withholding?

Jan 11, 2012 by

See, the government doesn’t trust you to have on hand and send in each April all the income tax you owe for the prior year. So the law compels your employer to take a chunk from each of your paychecks and send it to Uncle Sam. This process is referred to as “withholding.” You’re paying your income taxes in installments. If you have too little withheld from your paychecks over the year, you’ll owe Uncle Sam money when you file your income tax return in April. If too much was withheld, you’ll get a refund.

Did you get a big refund last year? Or has something recently changed—you got married, had a kid, took out a mortgage—that’s going to cause you to owe less federal income tax? Then consider visiting your employer’s payroll department to submit a new W-4 form (or TD1 if you work in Canada).

It’s your responsibility to let your employer know how much income tax to withhold from your pay. The W-4 form serves this purpose. To have less withheld, increase the number of “allowances” you claim on your W-4 form. Don’t go overboard—you don’t want to have too little withheld and then owe the IRS a lot of money on April 15th.

Since it seems no one likes sending money to the government, the resistance I sometimes get to this suggestion puzzles me. People talk about the pleasure of getting a fat refund check, which they look forward to using for a vacation or some other indulgence, and that the money would otherwise mostly evaporate a little bit at a time if it were included in paychecks. They talk about a tax refund as if it’s “found money,” not their own money that they’ve let the U.S. Treasury caretake over the year.

If you have a similar reaction, how about this: While you’re in payroll submitting your new W-4, ask them to set up an automatic deduction from your paycheck with the money going to your own special, separate savings account. If, for example, your take home pay goes up by $40 per paycheck once your new W-4 kicks in, then ask payroll to deduct from each paycheck and automatically deposit $40 into your special savings account. This is a great way to build an emergency fund if you don’t have one, or to save for any particular goal.

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