It’s your first day of work and before you can even take a seat at your workstation, you’re being asked to make a number of important decisions that will impact your wallet well into the next year. What is my tax filing status? How many personal exemptions should I take? Will I owe anything at the end of the tax year? If you are feeling a bit overwhelmed, don’t despair!
At Allegacy Federal Credit Union, our mission is to help you make smart financial choices and determining how much take home pay is best for you is a huge decision.
Here are some practical tips to help you navigate the challenges of tax withholding:
What does withholding mean?
Every pay period, your employer withholds a sum of money from your paycheck corresponding to your income. This withholding tax is paid by your employer to the IRS throughout the year and then reported to you on the W-2 form. At tax preparation time, you subtract this withholding amount from your tax bill. If your withholding exceeds your tax liability, you are entitled to a refund. If your withholding is less that your tax liability, you may owe Uncle Sam some additional cash. Ideally, you want your tax withholding and your tax liability to be as close to equal as possible.
The W-4 form is used to determine your tax liability and depending upon the number of allowances you claim, your employer will adjust the tax deductions accordingly. For many taxpayers, a standard deduction does not apply and they either face having too much or too little tax withheld.
Why would I need to adjust my withholding?
If you are in the midst of a life change – such as starting a new job, changing marital status, welcoming a child into the family, or facing chronic unemployment – your tax bill may be dramatically impacted by your current withholding status. While you may be entitled to a refund if too much of your hard-earned cash is being withheld from your paycheck, you could be granting the government an interest-free loan during most of the year. Think of the ways in which you could allocate or invest those funds if they were a part of your take home pay. Having too little withheld is not necessarily a better situation because you could face a hefty tax bill and possibly even a penalty for underpayment in the new year.
How can I adjust my withholding?
The secret to striking the right balance when it comes to tax withholding is to regularly review your W-4 and make adjustments, particularly when you experience a major life change. Also, when you file your taxes, take note of how much you owe or the amount of your refund. If either are substantial, you might want to make some adjustments. Your Human Resources Representative will be able to help you make those changes.