How To Adjust Your Withholding

It's tax time of year again, and it's a good time to remember to check that your paycheck withholding is correct.

The IRS said that last year more than 110 million taxpayers got refunds averaging $2,753 apiece. That's called overwithholding, and it can be corrected by simply filing a revised Form W-4 with your employer. The information you provide on the W-4 when you're first hired at a job determines how much federal income tax is withheld from your paycheck going forward. Most people fill out the W-4 that first time, and then don't ever think about it again, but did you know you're allowed to change the number of allowances you're claiming at any time? Your HR department is obligated to work with you on that.

So if you're someone who typically gets a big refund each year, and you'd like to start getting your hands on more of your money as you earn it (up to $230 a month if you're one of the average), here are a couple of easy steps you can take to make it happen:

Get out last year's tax return and your most recent paystub. You'll need one or both to find a few numbers like your total wages earned, retirement contributions and the sort.
Figure out how many allowances you need to claim to match the current withholding of your tax bill. I like the IRS' online calculator, but Kiplinger's also has a super-simple one too. Or if you're old-fashioned and like to sharpen your #2 pencil, use IRS Publication 919 How Do I Adjust My Tax Withholding?, and labor through their worksheets.
Take the number of allowances the calculator gives you to your HR department and ask to update your Form W-4.
Fill out the W-4 form and return it to your HR representative

Depending on your timing, you should see the changes appear in your next paycheck. And once you've done this, don't forget about it. If you have a major life change - like a marriage, birth of a child, or the purchase of a new home - go back through these steps. Your tax situation may have changed.

So to recap, consider making sure your payroll tax withholding matches your tax liability - no more and no less. If you typically get a big refund each year, consider getting that money in your paycheck as you earn it instead. Open a savings account, and stick that newfound money in there each time you're paid. When next April comes around, you'll still have a nice sum of money AND you got to earn the interest on it, rather than Uncle Sam!