A new job means a fresh start, but it also means filling out tax forms again. And even if you're not starting work someplace new, the IRS still recommends that you revisit your withholding form intermittently, as well as anytime you have a significant life change, such as a marriage or birth. This is especially important during years when important tax changes have taken place. The IRS even offers a free withholding calculator that makes it easier to estimate just how much needs to come out of your paycheck every pay period.
Why Adjust Your Tax Withholding?
Why is this such a big deal? There are two good reasons behind keeping your eye on your withholding amount. The first one is your annual tax refund. If your withholding percentage is set too low, you may not get a refund check at all. Or, the one you're expecting could be hundreds or even thousands of dollars less than you anticipated.
Secondly, withholding too little tax each week could set you up to owe a payment at the end of the year. For many people, this isn't a big deal. But if you're one of the millions of hardworking Americans living paycheck-to-paycheck, a surprise tax bill could wreak havoc with your finances. There are penalties assessed to taxes that aren't paid on time, and ignoring them is not an option. Owing back taxes can disqualify you for loans, for refinancing loans you already have, and for certain government positions, should you find yourself job hunting in the near future.
It's a vicious cycle to find yourself in, so practice prevention instead. Know whether you can afford to pay in at the end of the year and just how much you can swing. Or understand where the cutoff lies if you'd like a refund instead. Here's how:
Increase or Decrease Your Personal Allowances
Decreasing your personal allowances will net you smaller paychecks throughout the year, but you'll either owe less or you'll receive a refund at the end of the year. Having fewer allowances means the government withholds more money weekly. Increasing your allowances gives you bigger paychecks, but it may result in a tax bill come next April.
And if you're someone who doesn't mind skimping throughout the year to get a hefty annual refund, you can request that a set amount of money be withheld each pay period. This may be a good choice if you use your annual refund to foot big purchases, such as vacation. Just keep in mind that, if you're using your withholding as a type of savings account, doing it this way will net you no interest. It might be a better option to adjust your withholding so you get the money back all year long, instead of once annually. This way, you can invest the extra dollars each week in an interest-yielding account.
Regardless of how good or how bad you are with money, the IRS recommends adjusting your withholding tax in such a way that you neither owe nor receive money at tax time. This keeps everything simple, even and stress-free. You won't have to worry about owing back taxes, and you won't be biting your nails, waiting on a refund check that you desperately need. This is where the tax calculator comes into play. It will help you figure out just what you need to have withheld, according to how much you make. And that's the perfect place to be.
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