Income Tax Withholding on Your W-4 to Lower Your Tax Bill
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 arranged for too much to be 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. (Have your pay stub, your current number of withholding allowances, your 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. 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.
Individual Retirement Account (IRA): Those who meet IRS income requirements and other rules can deduct traditional IRA contributions. (See IRS website for deductibility details.)
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 FSA or HSA can also lower your over overall tax bill. Run the numbers.