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.
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.
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