Tax Planning
How to Adjust Your Tax Withholding
A do-it-yourself pay raise may sound too good to be true. But it's easily within the reach of most employees.
By Kevin McCormally, Editorial Director, Kiplinger.com
April 2012
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The nation’s tax system will be front and center from now until the presidential election in November. Should the Bush tax cuts be extended again or allowed to expire at year-end? What about the 2% payroll tax holiday, which is also scheduled to end on December 31? Is it time for a Warren Buffett tax on millionaires? Would strategically targeted tax cuts help revive the economy?
No matter how you come down on those big-picture questions, allow us to get personal: How would you like to reduce the amount of tax Uncle Sam claims from your paycheck each and every payday?
Chances are good that you have the power to do just that simply by filing a new Form W-4 with your employer to put an end to overwithholding from your paychecks.
USE OUR TOOL: Tax Withholding Calculator
Even as anti-Washington sentiment rises to a fever pitch, most middle-class Americans continue to allow the government to claim more than its share every payday. The proof: Once again this year, the government is churning out tax refunds. By the first of April, the IRS had already issued 75 million refunds; in the next few weeks, another 25 million or so will be sent to grateful taxpayers across the U.S. So far this year, refunds are averaging $2,826. That's significantly more than even the highest-paid worker gets all year long from a 2% payroll tax holiday.
Yes, we love our tax refunds. But wouldn’t it make more sense to get your money when you earn it?
If you agree with us that the answer is a resounding "yes," we have good news. It's easy to fix overwithholding. All you have to do is file a revised W-4 with your employer. The information on that little form determines how much federal income tax is withheld from your checks. The more "allowances" you claim on the W-4, the less income tax will be withheld.
Let's say you’re on course to get an average-sized refund again next spring. If you're in the 15% tax bracket (with taxable income between $8,700 and $35,350 if you file a single return or between $17,400 and $70,700 if you're married and file jointly), claiming an extra five allowances will reduce withholding by about $237.50 a month. So you'd get an extra $237.50 in your paychecks each month, and the IRS would still be withholding enough to cover the tax bill on your earnings for the year. In fact, since a few months have already passed in 2012, typical overwithholding has already banked a healthy refund for you.
How do you know how many allowances to claim? Worksheets that come with the W-4 will help, and you can get more-detailed instructions in IRS Publication 919, How Do I Adjust My Tax Withholding? Or you can struggle through the IRS's online withholding calculator.
The Kiplinger way
But we've got a better idea. If your 2012 financial situation is likely to be similar to 2011's, just use Kiplinger's Easy-to-Use Tax Withholding Calculator. Answer three simple questions (you'll find the answers on your 2011 tax forms), and we'll estimate how many additional allowances you deserve. We'll even show you how much your take-home pay will rise starting next payday if you claim the allowances on a new W-4.
Our quick-and-easy method is a rough guide, not gospel. And it's based on the assumption that your financial life hasn't changed dramatically. If you have a new baby, get a new job or have an adult child who qualified as a dependent in 2011 but won’t in 2012, for example, the calculator won't reflect how such events will affect your tax bill . . . and your tax withholding.
But for most Americans, our calculator will paint a reliable picture that should accomplish two important goals:
1) Get you motivated to grab a W-4 to pinpoint how many extra allowances you should claim; and
2) Get you more of your money as you earn it, rather than having to wait for a tax refund in the spring of 2013.
Most people fill out a W-4 when they first take a job and never think about it again. But you can change the number of allowances at any time. You probably should if you received a tax refund of $500 or more -- or if you owed more than 10% of your total tax bill when you filed your 2011 return.
Sneak preview: New tax benefits -- as well as burdens -- for 2012
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Reader Comments (21)
Posted by: maria at 03/23/2010 07:35:14 PM
how about if your husband is on disability and 1 spouse is working not making over 20,000 a year how many allowances can we put down?
Posted by: kevin mccormally at 03/28/2010 10:45:45 AM
Kevin McCormally of Kiplinger here with an answer for Maria. Great question. If you run through the instructions for the W-4, you'll see that they suggest you claim three allowances: one for yourself, one for your spouse and a third because only you work. However, if you claim 3, there would be nothing withheld for income taxes on a $20,000 annual salary. That might be perfect...but it depends on any other income you have...from investments, say, or if the disability pay your husband receives is taxable. (Sometimes it is, sometimes it isn't.) You can claim 3 allowances and pay nothing via withholding, but if that disability pay is taxable, you might owe when you file your return. If you get a refund on your 2009 return of all taxes paid, however, it suggests you should claim 3 and you'll be okay next Spring.
Posted by: george at 03/29/2010 10:49:12 AM
Is it true that under the health care reform act, the employer paid portion of a tax-payers health care plan will be taxable income beginning on 2011? So, if you make $50K per year and your employer pays $5K for your health coverage, your W-2 form will show $55K as taxable income? ouch!
Posted by: suzanne at 03/30/2010 10:07:29 AM
I used the tax withholding calculator and it said I should claim 7 extra exemptions on my W-4 form. Where on the W-4 form do I enter these extra exemptions or do I need to enter the dollar amount I want withheld?
Posted by: gina gonzalez at 03/30/2010 11:48:32 AM
My husband's employer will not let him claim more than 9 or 10? exemptions. I own a few businesses and my expenses offset his tax load, so we always get 100% back plus the extra 3000 for the kids. The employer (university) says it's a red flag to put more than 9 or 10 exemptions. I think it's the HR person's weirdness...please advise!
Posted by: Judith Jewell at 03/30/2010 01:18:23 PM
I am retired and elected to have no withholdings from my three retirement checks. I end up paying the Federal Government anywhere from $3000+ to $2,824 this year. I also pay the state of Missouri $263. I have been able to save the amount during the year and earn a little interest on my accounts. However, my Wisconsin Teachers retirement informed me they must take withholding out and so they did. Should I change my W-4's? I have Missouri teachers retirement and part of my X-husbands retirement. ( Plus Social Security)
Posted by: Christi401 at 04/01/2010 02:20:04 PM
Question: I am the head of household, married with a non working husband whom I am separated from, I have 4 kids ages 16, 14, 5, 3 and own a home. I make 44K gross per year. What is the max that I can claim without having to pay into the IRS as we need the money now not next year! Please respond.
Posted by: Lee VanDusen at 04/05/2010 08:16:48 AM
If you are single with no dependents you are unable to claim the 3 allowances that the guide says I could claim. Am I correct?
Posted by: Kathy at 04/09/2010 09:27:28 AM
I am married filing separately, claiming one exemption and always owe the IRS? Any suggestions?
Posted by: Ms Smith at 04/25/2010 01:03:26 PM
It is now April, if I revise my w4 now and list an additional amount to be witheld from each paycheck.....will the IRS go back to January and collect those amounts or just begin with my next pay period???
Posted by: kevin mccormally at 06/21/2010 09:58:18 PM
Kevin McCormally of Kiplinger here, with an answer for George who asks if health care benefits will be taxed starting in 2011 when the value of employer provided benefits will be reported on W-2 forms. No. No. No. Although the value of the plans will be report on 2011 W-2s, the one you'll get in 2012, the amount is for informational purposes only. It will NOT be included in your taxable income. The folks who say it will are using this threat as an anti health care reform ploy. Don't worry. It ain't true.
Posted by: kevin mccormally at 06/22/2010 09:56:26 AM
Kevin McCormally of Kiplinger here with an answer for Ms. Smith who asks, if she adjust her W-4 now, will the change retroactively affect previous withholdings. The answer is "no", any change will go into effect for your next pay period. That's why I say in this latest update that if you change at mid year, any overwithholding during the previous months will be returned to you in a refund next Spring.
Posted by: kevin mccormally at 06/22/2010 10:05:46 AM
Kevin McCormally of Kiplinger here with an answer for Kathy who, as a single person claiming a single withholding allowance, always seems to owe the IRS at tax time. You may want to file a new W-4 with your employer dropping that single allowance...and claiming zero. If you're in the 15% bracket (with taxable income between $8,375 and $34,000, that would hike withholding by $45 a month for the rest of the year. If you're in the 25% bracket, with taxable income up to $82,400, the change would boost withholding by $76 a month. If you're in the 28% bracket, the bump would be $85 a month. If any of those changes would wipe out your tax liability next Spring, you're set. Otherwise, you 'll need to enter a dollar amount on your W-4 -- the extra amount you want your employer to withhold for the IRS. See IRS Publication 919 for details: http://www.irs.gov/pub/irs-pdf/p919.pdf
Posted by: Kendra at 06/27/2010 10:16:00 PM
I am new to teaching summer school this year (for an additional hourly rate to be added to my contracted pay), and was told to change my withholdings, but I don't know what to change to. The calculator said that there should be 4, but is this just due to the added income or should I leave it there, considering next year's contract is decreased (starting with Aug school yr.)? Also, should my husband change his too in general? I believe we are in a 25% tax bracket. This article was helpful, thank you! I just want to be sure I do this right.
Posted by: kevin mccormally at 06/28/2010 08:12:07 AM
Kevin McCormally of Kiplinger here with a response for Kendra who asks how additional earnings this summer might affect the number of allowances she should claim. The big question is whether taxes re being withheld from your summer-school earnings. If so, if you're claiming the right number of allowances, approximately the right amount should be withheld from the additional earnings. If our calculator shows that, based on last year's refund, you should be claiming an additional four allowances, I'd say you should be claiming more allowances, not fewer. However, if no tax is being withheld from your summer earnings, then you might want to not add those extra allowances -- or at least not all of them -- so that overwithholding on our wages during the rest of the year can cover the tax on the summer earnings. Sorry I can't offer a more concrete answer based on the limited info I have. You might want to check out IRS Publication 919. http://www.irs.gov/pub/irs-pdf/p919.pdf The worksheets in the pub might be helpful. Good luck.
Posted by: kendra at 06/29/2010 11:53:20 PM
Thank you Kevin for your response. Yes, that helps, and yes, there is tax taken out of the additional earnings (and why everyone kept saying more tax will be taken out because it will seem like my salary has changed). So, I will go with the 4, I just didn't understand (and really still don't know) what that meant in terms of dollar amount and how I would know by doing this that I would be able to get a small refund or break even. I understand many concepts, but this stuff is like a cipher to me. Thanks again!
Posted by: Sophia at 07/09/2010 03:33:27 AM
Mr. McCormally, I am married with 4 children and my husband is a stay at home dad with no source of income (long story--in short because we wouldn't be able to afford childcare if we both worked). When I used the IRS's "exemption calculator" it informed me that I could claim up to 14 exemptions. I am an educator and my yearly salary is roughly 53,000. If I claim the 14 exemptions will I still get any "refund" next tax season such as child tax credit, additional child tax credit, teacher tax credit, e.t.c...?? Thanks in advance for your response.
Posted by: Ms. Woolf at 08/14/2010 06:33:21 PM
Hello, I'm in the same boat as Suzanne when I did the calculator...who made the comment on 3/30/2010. However, I am startiing a new job next week. It will take me from $64,900 I claimed gross in 2009 to $82,000 starting this month. Before I file my W-4 (married, one income--spouse not working just full-time in school), how do I fill this out on the w-4 form? I used the tax withholding calculator and it said I should claim 7 extra exemptions on my W-4 form. Where on the W-4 form do I enter these extra exemptions or do I need to enter the dollar amount I want withheld?
Posted by: william at 09/23/2010 06:40:12 AM
i have a question, i am married with 1 child and 1 on the way but i claim 3 on my paycheck and they don't take any state or federal out on my check. does that mean i will owe at the end of the year?
Posted by: kevin mccormally at 09/29/2010 01:46:48 PM
Kevin McCormally of Kiplinger here with an answer for William who says no state or local income tax is being withheld from his checks and wonders if that means he'll owe taxes when he files his return next Spring. It depends on where you live. Most cities don't impose an income tax and seven states have no state income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. Two others, New Hampshire and Tennessee, tax only dividend and interest income,not wages. If you live in a state that has an income tax, check with your employer to see why taxes are not being withheld from your checks. Hope this helps.
Posted by: BRANDY at 10/06/2010 09:24:13 PM
I was unemployed from 2008-2009. I was on umemployment and working as contract worker so I received a 1099 at the end of the year. I didn't withhold any taxes from my unemployment and of course, no taxes were taken out of the paycheck for my contract work. I ended up owing the state, but somehow managed to get a very small refund for federal. I am single, no dependents and am now working full time. My Filing Status for Federal Income Tax is S2. Should I claim head of household? Does this make a difference in the amount I bring home and what I should get back next year? For State Income Taxes My filing status is S010. I'm thinking I don't understand the W-4 and possibly filled out incorrectly. What is the max that I can claim as a single person?