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The Real Reason to Adjust Your Tax Withholding

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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


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