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Income Tax Withholding on Your W-4 to Lower Your Tax Bill

IRS W-4 form

Proper planning will help you keep more of your paycheck and pay less to the Internal Revenue Service (IRS) each year.

You control how much is withheld from your paycheck. When you started your job, you completed a W-4 form, which tells your employer how much to withhold for the IRS on your behalf. To ensure you withhold just the right amount, use the IRS’ Withholding Calculator. Also, take a look at the size of your tax refund each spring.

Too much: If you get a refund, you had too much withheld from your paycheck. It would be better to have a little extra in your paycheck throughout the year, because otherwise, it’s like you’re giving the government an interest-free loan.

Too little: If you pay too little throughout the year, you’ll be hit with a big bill when you file your taxes, and you could face penalties and interest charges. Use this calculator to see if you’re withholding enough. (You'll need your pay stub, current number of withholding allowances, retirement plan savings percentage, any other payroll deductions, and your state tax rate ready.)

How to Adjust Your Withholding

To make changes to your W-4, see your benefits department or download a W-4 from the IRS. Taxpayers generally take one withholding allowance for themselves and each dependent. If you itemize deductions, you also can allot for deductions you take every year—such as for mortgage interest, property taxes, and charitable giving—if you itemize. Increasing allowances will leave more in your paycheck, while lowering allowances will withhold more.

When to Adjust Your Withholding

There is no limit on how often you can adjust your withholding, so complete a new W-4 form every time your life changes in a way that affects income taxes, such as:

  • Starting a new job
  • Changing benefits
  • Having a baby
  • Getting married or divorced
  • Buying a home

Lower Your Tax Bill

Saving and investing plans can help lower your tax bill as well.

Individual Retirement Account (IRA): Those who meet IRS income requirements and other rules can deduct traditional IRA contributions.

Employer retirement plans: Contributing to a tax-deferred 401(k), 403(b), or 457 retirement plan will lower your tax bill. (SEP-IRAs, Keoghs and Solo 401(k) plans will do the same for the self-employed.)

Medical expenses. Contributing to an flexible spending account (FSA) or health savings account (HSA) also can lower your over overall tax bill. Run the numbers.

[Any reference to a specific company, commercial product, process or service does not constitute or imply an endorsement or recommendation by the National Endowment for Financial Education.]

See this article in Spanish: Las retenciones del impuesto a las ganancias de tu W-4 reducen el monto de impuestos que debes pagar