- Days left

The Real Reason to Adjust Your Tax Withholding

Tax photos why you should change withholding
Cassandra Hubbart, DailyFinance

(Updated: April 23, 2013)

With tax refunds arriving around the country, we're all hearing the annual chorus of financial advice telling you why getting a refund is actually a bad thing. But even though changing your withholding to get your money back faster may not be all that important right now, it can be very important if your family situation has changed.

The conventional wisdom on why big refunds are bad is that they mean that you've let Uncle Sam hang onto your money all year interest-free. Instead of having it squirreled away all year, you could have been spending that money throughout 2012.

But at least right now, letting the government have that interest-free loan isn't a big deal. That's because banks aren't paying you much interest on your money anyway. So if having too much taken out of your paycheck helps you gather up a savings nest-egg in the form of your tax refund, that could end up being better than just spending a few extra bucks every week.

When You Must Change Withholding

On the other hand, sometimes you really need to change your withholding. The most common case is when you get married or divorced, or have a child. For one-earner couples, if you get divorced, the wage-earning spouse will usually see a big increase in taxes. If you don't change your withholding, you won't have enough tax taken out -- opening yourself up to penalties and interest.

Marriage can bring some two-earner couples a bigger tax bill than they paid in total when they were single. Again, that can turn what was a refund into a year-end tax bill if you don't make any changes to your withholding.

Finally, having children can have an impact on your withholding. Because of personal exemptions and child tax credits, you may owe less in tax after having a child, giving you an opportunity to have less withheld. But if a stay-at-home parent returns to the workforce, it can create the same two-earner tax problems that married working couples face.

What to Do

If you're not sure about your withholding, you can always go to your HR department for guidance. They'll tell you how to fill out Form W-4 to make sure your withholding gets done right -- and works the way you want it to.

And in the meantime, if you got one, enjoy your refund!

For more tax info, visit the DailyFinance Tax Center

Increase your money and finance knowledge from home

Understanding Credit Scores

Credit scores matter -- learn how to improve your score.

View Course »

Getting out of debt

Everyone hates debt. Get out of it.

View Course »

TurboTax Articles

Video: Tax Guidelines About Gifting

Note: Some of the content of this video applies only to taxes prepared prior to 2012. It is included here for reference only. Find out the tax guidelines about gifting with help from TurboTax in this video on tax tips.

Video: What are Income Tax Rates?

Note: The content of this video applies only to taxes prepared for 2010. It is included here for reference only. Income tax rates change depending on both the amount of money you make and how you made it. Find out about income tax rates with help from TurboTax in this video on tax tips.

Video: How To Reduce Errors on Your Tax Return

Did you know that errors on your tax return can affect the amount of your tax bill and the amount of time it takes to get a refund? Fortunately, TurboTax helps you avoid errors AND be sure you're getting all the tax deductions and credits you deserve.

Does Your Company Need to File Form 1095-B?

A company is responsible for filing IRS Form 1095-B only if two conditions apply: It offers health coverage to its employees, and it is "self-insured." This means that the company itself pays its employees' medical bills, rather than an insurance company. A company that doesn't meet both conditions won't have to deal with Form 1095-B. Its employees might still receive a 1095-B, but from their insurer, not the employer.

Video: Who Qualifies for an Affordable Care Act Exemption (Obamacare)?

The Affordable Care Act requires all Americans to have health insurance or pay a tax penalty. But, who qualifies for an Affordable Care Act exemption? Find out more about who qualifies for an exemption from the Affordable Care Act tax penalty, how to claim an exemption on your tax return and how the Affordable Care Act may affect your taxes with this video from TurboTax.

Add a Comment

*0 / 3000 Character Maximum


Filter by:

To finance Timmy Geithner's debt!

March 22 2012 at 12:24 AM Report abuse +1 rate up rate down Reply

Better to over-pay than under-pay. Financial advisors, like wh*res, are on every street corner. They're lemmings for the most part anyway. Every last one of that ilk can be bought with a steak and a beer to schlep the latest get rich quick scheme.

March 19 2012 at 2:35 PM Report abuse +1 rate up rate down Reply
1 reply to ilm9p's comment

Why overpay??? Ever heard of tax planning??/ Pay quarterly?? If you like overpaying - send me your money.... you must be a LIB...

March 20 2012 at 11:16 AM Report abuse rate up rate down Reply