The IRS recently pointed out that some taxpayers received a refund that was larger than expected last year. In other words, they may have paid too much tax throughout the year, taking home less money in their paychecks. That’s great news if you’re hoping to plan a vacation or put a lump sum into savings. Not so great news if you could have used that extra money in each paycheck.
Taxes are a pay-as-you-go system. They are either paid as income earned or received during the year through withholding or estimated tax payments. You can control the amount of your take-home pay and the size of your tax refund by adjusting the amount of tax your employer withholds from your paychecks. The IRS’s free, comprehensive tool called Paycheck Checkup helps taxpayers determine the right amount their employers should be withholding.
The IRS notes that you should check your paycheck withholding if you:
- Had a larger-than-normal tax refund last year
- Had a larger-than-normal tax bill last year
- Have multiple jobs or are a two-income family
- Work a seasonal job or only part of the year
- Claim the child tax credit
- Have dependents over age 17
- Itemized your deductions in previous tax years
- Have high income or a complex tax return
As part of the Paycheck Checkup tool, the Withholding Calculator offers recommendations for adjusting withholding. Taxpayers who want to increase the amount withheld from their paychecks would pay less tax throughout the year by increasing the number of allowances on Form W-4. On the other hand, taxpayers who prefer a larger refund when they file would decrease their withholding allowances on Form W-4. Decreasing the number of allowances means paying more tax throughout the year and receiving a smaller paycheck. Everyone’s needs and preferences are different, so having this option to adjust can be very beneficial.
That said, if a taxpayer does not pay not enough tax through withholding and estimated tax payments, the IRS may charge a penalty. All the more reason to use the Paycheck Checkup to avoid an unexpected tax surprise next April.
A West Point graduate where he served as captain and military aviator, John Bair continues his commitment to our country through his efforts within the settlement planning industry. He has represented families of victims lost in the Flight 3407 crash, offered pro bono services to the families of 9/11 victims and drafted the first consumer protection bill for plaintiffs (H.R. 3699).