How to Adjust Tax Withholding from Your Paycheck

Accurately Calculate Your Withholding for Federal Income Taxes

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Dealing with your taxes isn't just a matter of finishing your tax return. Now it's time to do a little planning ahead for next year. Life isn't stagnant and your income or deductions may have changed, or you may have reason to believe that they're about to. You may want to adjust your withholding to avoid receiving too large of a refund or owing a significant balance to the Internal Revenue Service.

How can receiving a big refund be a bad thing? Because it means you gave the IRS a larger portion of your paychecks than you had to — money that you could have been spending on bills, on pleasure, or put into savings or investments. Instead, the IRS held onto it for you and is now returning it to you — without interest. 

Finding just the right level of withholding can be a tricky balancing act, particularly if you anticipate significant changes to your income or deductions. These guidelines can help you get it right. 

Disregarding Your Withholding Can Be Taxing

Calculating a level of withholding that is "just right" can sometimes take as much time as preparing your tax return. A lot of people are inclined the skip the math. For those who want to keep things as simple as possible, the easiest course of action is for taxpayers to claim either "single" or "married" with one withholding allowance on Form W-4.

This usually results in a refund, but there are situations in which claiming one withholding allowance is not sufficient to cover your tax liabilities. This would be the case if you had significant investment income or a greater tax obligation due to the alternative minimum tax

Calculating Withholding More Accurately

A more accurate way to adjust your withholding is to prepare a projected tax return for the current year. Use the same tax forms you used last year, but substitute the current tax rates. Calculate your income and deductions based on what you expect for the current year and use the current tax rates to find out what your projected tax will be. Now use the withholding calculator found on the IRS website to see what the suggested withholding allowances might be. 

What's a Withholding Allowance?

Withholding allowances don't pertain just to dependents or to the personal exemption, although they're related. A withholding allowance is a way for your payroll department to use tables provided by the IRS to figure out how much tax to withhold from each of your paychecks. A withholding allowance represents your total tax deductions divided by the personal exemption amount. This results in a ratio, and the ratio tells you how many withholding allowances you should claim.

Here's an example. Let's say Mary is a single parent and she qualifies as head of household. She has one dependent. Let's further assume that her deductions consist of the standard deduction and two personal exemptions, one for herself and one for her child. The math for her withholding allowances would work out like this for the 2017 tax year:

  • Standard deduction: 9,350
  • Personal exemptions: 2 x 4,050 = 8,100
  • Total tax deductions: 9,350 + 8,100 = 17,450
  • Deductions divided by one personal exemption amount: 17,400 / 4,050 = 4.308

In this example, Mary would claim single as her filing status and four withholding allowances on her W-4 form. It's advisable to round down the ratio to avoid having too little tax withheld from your paycheck, so she wouldn't claim five. Mary would check the "single" box on line 3 of the Form W-4 and she would write "4" on line 5 where it asks for "Total number of allowances you are claiming."

Now that you've figured out your withholding allowances, you can use this number to see what the tax impact will be on your next paycheck. Plug your newly calculated withholding allowances into a payroll calculator. Make sure you have a recent pay stub handy so you can use your actual income amounts.

Calculating Your Total Withholding for the Year

Now take your new withholding amount per pay period and multiply this by the number of pay periods remaining in the year. Add in how much federal income tax has already been withheld so far year-to-date. This amount represents approximately how much total federal tax will be withheld from your paycheck for the year. You can now compare your total withholding to your tax liability projection. If your withholding amount is larger than your tax liability, that's how much of a federal tax refund you can expect to receive.

If your withholding is less than your tax liability, this is how much federal tax you might have to pay when you file your tax return.

Remember, these amounts — your withholding and your tax liability — are approximate. If they're not too far apart, you're close to where you need to be. If your calculations show that you'll owe the IRS $500 in April, ask yourself if you can easily write a check to the government for that amount plus a little interest. If you can't, now is the time to adjust.

Adjusting Your Withholding 

Go back to the payroll calculator to fiddle with your withholding allowances. Try "single" instead of "married," or try changing the withholding allowances by one point at a time. For example, if you used Single-4 the first time, try a new calculation with Single-3. 

Repeat this process until you find the withholding level that's right for you. Ideally, your withholding will produce a refund in the $500 to $1,000 range. This gives you plenty of room so any changes in income or deductions won't result in you owing very much.