- Days left

Your taxes are filed and done. Victory dance?

Actually, hold on. There's one more step you should take.

Before you X out of this window and head off to get a frustration cupcake, let us just tell you that this step that will save you either money, stress or both.

It's taking another look at your withholding.

Your withholding is the amount of money that comes out of your paycheck every month to cover your taxes. By taking taxes a little bit at a time, the government makes your tax bill much more palatable. Imagine if you had to save up and pay your whole tax bill all at once? Not fun.

But really, your withholding is based on an estimation of what you'll owe in taxes. If you're familiar with the way credits, deductions and exemptions work, you know that many factors affect your total tax bill. When you do finally sit down to calculate your taxes, the reality could be far off that estimate.

The big goal is to get your withholding as close to your actual tax bill as possible. We'll tell you how to get there.

(By the way, if you are self-employed, there is an equivalent to withholding you should know about.)

If You Got a Refund Larger Than $1,000 ...

That means your withholding was too high. You might have really enjoyed getting a big check from the government, but it isn't the smartest financial decision. Let's say you got a refund for $3,000 (close to what the average refund will be this year). That means you gave the IRS $3,000 too much in what amounts to an interest-free loan. You could have had that money in your retirement account instead. Even if it only grew by 1% in a savings account, that is $30 you missed out on.

Now, some people use this as a way to save money. We get it! But a better way would be to set up automatic transfers from your checking account to a savings account, which accomplishes the same thing without getting the IRS involved.

If You Owed Taxes ...

That means your withholding was too low, and you got a nasty surprise. (If you owe taxes that you can't afford, read this post on what to do.) There's no need to explain why this isn't ideal! You just got an unexpected bill that might come out of your savings -- or add to your debt.

If Your Withholding Was Accurate ...

You still want to take a look at it if one of these things happened last year or will happen this year:

  • You got or will get married
  • You got or will get divorced
  • You had or will have a child
  • You or your spouse changed or will change jobs
  • You purchased or will purchase a home
  • You got hit with the Alternative Minimum Tax (or if you think you will get hit with it because you got a raise; this tool from the IRS can help you figure that out)
  • You got or will get a windfall, like prize-winnings or a lot of income from investments

Am I Exempt From Withholding?

Some people are exempt from withholding entirely. This only applies if you had zero tax liability last year and expect to have zero tax liability this year too. If so, line 7 on the W-4 is where you indicate this.

How to Change Your Withholding

1. Get in touch with the HR department or equivalent at your job and request a W-4 to fill out, or download it here.

2. Get familiar with allowances. In order to fill out your W-4 properly, you'll need to understand the concept of allowances. Allowances are what your employer uses to determine how much you will probably pay in taxes and hence how much to withhold. They are related to exemptions, but not the same, so don't expect the number of allowances to equal the number of exemptions. Each allowance lowers the amount of money that will be withheld from your paycheck. Before filling out your W-4, you will need to know if:

  • Someone claims you as a dependent. Find out here if this applies to you.
  • Your spouse makes more or less than $1,500. If they make less than $1,500, you'll take an allowance for them. But if they make more than that, you probably won't.
  • You have a dependent. Find out if you have dependents (and this isn't just for your children).
  • File as head of household. Find out your filing status.
  • You will pay $1,900 or more in qualified child care or dependent expenses. Find out more.
  • You will claim the Child Tax Credit. Learn more.
3. Use the IRS withholding calculator. It will walk you through everything to get to the number of allowances you should take.

4. Fill out your W-4. Now that you have all the information you need, you can get down to business. If your finances are fairly simple, you can just use the first sheet, which is remarkably straightforward for a tax form.

There are some instances when you should use the worksheet on the second page to decide the number of allowances you will take:

  • You plan to itemize your deductions next April. Find out here if you should itemize your deductions.
  • You and your spouse both work and earn more than $1,500.
  • You yourself have two jobs.

5. Decide if you want additional withholding. If you get to the end of the worksheet and you find that you are getting the same withholding as last year, but you didn't have enough withheld and got hit with a tax bill when you filed this year, the form has a place where you can add in additional withholding so that doesn't happen again (line 6). Just divide the amount of your tax bill by the number of pay periods left in the year and write that down.

You should also ask to have additional withholding if you will fall into the AMT this year, or you've gotten or will get a windfall in 2012 that will be taxed.

6. Sign the form, turn it in to your employer and you are all set!

7. Redo your budget to reflect the change in your paycheck. Now that your withholding is different, you want to make sure you are prepared for the change in income, so pop into the My Money Center and rework the numbers in your budget so you are prepared.

More from LearnVest

Increase your money and finance knowledge from home

Intro to Retirement

Get started early planning for your long term future.

View Course »

Goal Setting

Want to succeed? Then you need goals!

View Course »

TurboTax Articles

Cities with the Lowest Tax Rates

The total amount of tax you pay reaches far beyond what you owe the federal government. Depending on where you live, most likely you're required to pay additional taxes, including property and sales tax. The disparity between the amount of tax you pay in a low-tax city and that in a high-tax city can be dramatic. Living in any of these 10 cities could save you a bundle, although the exact amount may fluctuate based on your income and lifestyle choices.

Cities with the Highest Tax Rates

Much ado is made in the press about federal tax brackets, but cities can carry a tax bite of their own. Even if you live in a state that has no income tax, your city may levy a variety of taxes that could eat away the entire benefit of living in an income tax-free state, including property taxes, sales taxes and auto taxes. Consider all the costs before you move to one of these cities, and understand that rates may change based on your family's income level.

Great Ways to Get Charitable Tax Deductions

Generally, when you give money to a charity, you can use the amount of that donation as a deduction on your tax return. However, not all charities qualify as tax-deductible organizations. While there are many types of charities, they must all meet certain criteria to be classified by the IRS as tax-deductible organizations. There are legitimate tax-deductible organizations in many popular categories, such as those listed below.

A Freelancer's Guide to Taxes

Freelancing certainly has its benefits, but it can result in a few complications come tax time. The Internal Revenue Service considers freelancers to be self-employed, so if you earn income as a freelancer you must file your taxes as a business owner. While you can take additional deductions if you are self-employed, you'll also face additional taxes in the form of the self-employment tax. Here are things to consider as a freelancer when filing your taxes.

Tax Deductions for Voluntary Interest Payments on Student Loans

Most taxpayers who pay interest on student loans can take a tax deduction for the expense ? and you can do this regardless of whether you itemize tax deductions on your return. The rules for claiming the deduction are the same whether the interest payments were required or voluntary.

Add a Comment

*0 / 3000 Character Maximum

1 Comment

Filter by:

Think about conversion from IRA at a known TAX - Rate today
vs. NO TAXES on ROTH in the future UNknown Tax Rate . . .
TRUST me, the future OBAMA's do want to get our retirement
accounts we worked for. . . to pay for them who 'JUST VOTE!'
PLUS it can be given to another with a limited TAX Event.

March 19 2012 at 4:35 PM Report abuse rate up rate down Reply