Financial Planning

It is always nice to receive a federal income tax refund each year, but wouldn’t it be nicer to not have to wait all year for the money? Adjusting the Internal Revenue Service (IRS) Form W-4 can result in the money being delivered each pay period via employer paycheck. That money can be spent on necessary items or put into a savings account that earns interest.

It may have been years since the initial W-4 was completed, so take some time to review it. If personal or financial changes have occurred, or if changes in tax law could change your tax liability, complete a revised form and present it to your employer. The form contains instructions regarding the number of allowances that should be claimed in order to match tax withholding to the amount of taxes owed at the end of the year.

Despite the belief of some that the IRS is on a mission to over withhold taxes from the average American, the reality is quite the opposite. The agency has a withholding calculator on its Web site in order to help taxpayers calculate the accurate amount of tax withholding. In addition, IRS Publication 919- How Do I Adjust My Tax Withholding deals with this topic in detail.

Though these tools are available, it does not mean that one can go crazy adjusting withholding allowances like a kid in a candy store. Taxpayers may claim only the number of allowances to which they are entitled. Refer to the Form W-4 instructions and Publication 919 to see if withholding can be decreased by increasing the number of allowances.

There is no reason to give extra money to the government, only to have it returned months later. That money can be put to much better use covering necessary expenses, making investments, or being saved for the future. Review the withholding allowances claimed on the W-4 and make any adjustments in order to have withholding match annual tax liability.