We always advise our readers to keep tax refunds to a minimum to avoid giving Uncle Sam what amounts to an interest-free loan all year long. But we also acknowledge that some people still like big refunds and see them as a kind of forced savings account. It’s your money. Whichever you prefer–large refunds or small ones–there’s an easy way to influence the size of your next refund (or to avoid having to write a check to the IRS next April 15).
All you need to do is adjust your “withholding allowances” and give your employer a new W-4 form. The number of allowances you claim on the form controls how much federal income tax will be withheld from each paycheck. The amount of total tax that is withheld during the year directly impacts the size of your refund (or the amount you have to pay to the IRS). Claim more allowances to reduce the refund on your next return (and increase the amount of each paycheck), or claim fewer allowances to increase your next refund (but shrink each paycheck). It’s that simple.
To get started, check out Kiplinger’s new Easy-to-Use Tax Withholding Calculator. It’ll help you determine how many more or fewer allowances to claim depending on your goals for your next tax return. We updated the tool to account for different taxpayer objectives. So, with the new calculator, you can now get withholding allowance recommendations if you:
— Got a refund on your last return and want to break even next year;
— Got a refund on your last return and want a larger refund next year;
— Owed tax on your last return and want to break even next year; or
— Owed tax on your last return and want a refund next year.
By answering a few basic questions, you’ll get guidance on how to adjust your withholding allowances in just seconds. We’ll also show you how the changes will affect your take-home pay. With this information in hand, you’ll be better prepared to complete a new W-4 and submit it to your company’s human resources department.
(Article written by Rocky Mengle)