If you received a big tax refund last year, you might be withholding more than you are required to. Excess withholdings mean that you are essentially providing an interest-free loan to the government. In order to reduce your tax refund but increase your regular take-home wages, you would need to reduce your withholding. You can do that by adjusting the amount of allowances you claim on your Form W-4.
Major Changes in Life
It is important to review your tax withholding, especially when there has been a major change in your life during the year. Examples include a change of job, promotion, birth of a child, older child no longer a dependent, marriage, divorce, major financial gain, or major expenditure.
IRS Withholding Calculator
The IRS provides a Withholding Calculator, a tool that helps taxpayers to calculate the amount of taxes they should withhold from their paycheck. The Withholding Calculator can be used by:
- Employees who want to reduce their tax refund or balance due
- Employees whose situations are only approximated by the worksheet on the paper W-4, such as those filing as head of household, and those with children eligible for the Child Tax Credit
- Employees having non-wage income after adjustments and deductions, who prefer to have taxes withheld from their paychecks rather than pay estimated taxes.
You need to have your recent pay stubs and recently filed income tax return to work from accurate information when using the Withholding Calculator.
How to Withhold More
If you are withholding less than you are required to, you risk owing back taxes. To withhold the maximum amount in taxes, enter 0 on line 5 of Form W-4. Alternatively, you may use the IRS Withholding Calculator and report the exact dollar amount that you want to get withheld by entering it on line 6 of Form W-4.
To avoid withholding too much or too little from your paycheck, check your withholding before the end of the year. If you receive a minimum refund or none at all in 2016, it can indicate that your withholding was accurate.