We're thrilled to present this smart Kiplinger story here on Savvy!
Political theater over whether or not to extend the 2% payroll tax holiday has overshadowed the fact that most workers can do more to reduce the amount of tax withheld from their paychecks than anything cooked up in Washington.
The power-to-the-people ploy? Using a W-4 form to put an end to overwithholding from your paychecks. First, let's set the stage. 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 single payday. The proof: In 2011, 109 million of the 145 million individual tax returns filed called for refunds. That's 75%. The average refund last year: $2,913. That's significantly more than even the highest-paid worker gets from a 2% payroll tax holiday.
Yes, we love our tax refunds. But we ask this simple question of those of you who get refunds year after year: Doesn'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. Unlike stubbornly high unemployment, it's easy to fix overwithholding. All you have to do is file a revised Form 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.
Read on for more.
Let's say you're that average taxpayer. 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.
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 the most recent tax return you filed), 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.
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