Update Your W-4 To Avoid Overpaying Taxes
According to Internal Revenue Service (IRS) statistics, the agency issues refunds each year to more than 100 million taxpayers who overpaid their taxes. If you received or expect to receive a refund, the Virginia Society of CPAs recommends that you adjust the amount of taxes your employer withholds from your paycheck.
While most people enjoy receiving a refund, you should aim to have your withholding come as close as possible to matching your actual tax liability. When you have too much withheld from your paycheck, you’re giving the government free use of your money — money you could use throughout the year to generate income, pay off debt or meet expenses.
Adjust your withholding
To adjust your withholding, file a new Form W-4, Employee’s Withholding Allowance Certificate, with your employer. The earlier in the year you do this, the easier it will be to have the appropriate tax withheld for the current tax year.
Your employer utilizes the information you supply on your Form W-4 to determine the appropriate withholding amount. There are two key pieces of information you need to provide. The first is whether you choose to have taxes withheld at the married or single rate. Only taxpayers who are married and file a joint return should choose the married status, which calls for a lower withholding rate. Others are best off having taxes withheld at the higher, single rate. The second is the number of withholding allowances you claim. You can claim any number of allowances — up to the maximum number to which you’re entitled. Or, you may claim fewer allowances than you are entitled to — even zero. The more allowances you claim, the fewer taxes withheld.
Choose the right number of allowances
The Form W-4 includes several worksheets: a personal allowance worksheet, a deductions and adjustments worksheet, and the two-earner/two-job worksheet. To determine the appropriate number of allowances, the IRS suggests that you complete each of the Form W-4 worksheets that apply to your circumstances. If you prefer, the IRS website offers an online W-4 calculator that estimates your tax bill and recommends the number of allowances you should claim.
Update your withholding information
Once you’ve revised your W-4 to correct your overpayment, you may think you’re set for a while — not necessarily. There are many factors that can change your tax status during the year and may require revising the number of allowances you claim. For example, you may need to tweak your withholding when you get married or divorced, have or adopt a child or when you gain or lose a dependent. Other factors include changes in your income or in the adjustments, credits and deductions you can claim for tax purposes.
Making the most of the extra cash in your paycheck
With your withholding corrected to avoid overpayment, you’ll find more money in each paycheck. Rather than spending that extra money, put it to work for you and your family. Deposit the extra cash in a savings or money market account, add it to your retirement savings or invest it. If in the past you intentionally overpaid your taxes as a form of forced savings, there’s a better way. You may be able to arrange to have an amount deducted from your paycheck each month and automatically credited to a savings or investment account.
Getting advice from a CPA
Calculating an appropriate withholding level can be challenging. A CPA can help you determine the correct number of allowances to claim.
The Virginia Society of Certified Public Accountants (VSCPA) is the leading professional association dedicated to enhancing the success of CPAs. Founded in 1909, the VSCPA has 9,000 members who work in public accounting, industry, government and education. For general information, please visit the Press Room on the VSCPA website at www.vscpa.com, e-mail email@example.com or call (804) 612-9424. To search for a CPA in your geographic region, visit www.financialfitness.org and click on “Find a CPA.”
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