How to Adjust Federal Tax Withholdings

by Kevin on May 7, 2010

In my previous post I showed how Alabama would pay interest on really late tax refunds.

I mentioned in that post that, obviously, you don’t want to be waiting a long time for your tax refund (state or federal). What can you do? Aren’t you helpless to accept on when the government sends your money back?

Not quite.

Change Federal Tax Withholding

Remember when you were first hired at your new position you had a big stack of papers to fill out? Someone from human resources handed it to you, you sat in a room or a cubical and filled it out, and kindly turned it back in?

There was an important form in that state of papers. Your Form W-4.

This somewhat complicated form allows you to adjust how much federal tax is taken from each of your paychecks. The more allowances you claim, the less tax is removed.

Increase Allowances to Reduce Your Tax Refund

You can submit a new W-4 form to your employer at any time during the year. If you just received a massive refund you might consider making some changes to reduce the refund.

You can do so by increasing the number of withholdings that come out of every check. (Your total number of allowances goes on Line 5.)

Increasing your allowances tells the government to pull less tax out of every paycheck. Thus at the end of the year less total tax has been taken out, and your refund should be smaller.

Monitor Tax Allowance Changes

I highly recommend that you don’t make massive changes on your W-4. Don’t go from zero claimed allowances to nine.

After you make your W-4 adjustments make sure to check the next few paychecks. Look at the difference in the federal withholding that has been taken out.

If something seems amiss go back to your HR representative to confirm the changes you made, and if things are still out of whack, revert back to what you had. It’s not an exact science by any means.

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Finance Nerd May 7, 2010 at 7:39 am

Couple points:

1. This works for Federal, but does not always work for state. For example, OH does not allow you to claim more withholding allowances than the number of exemptions you can claim. This despite the fact that the withholding tables are so badly calibrated that you are almost certain to be over-withheld (unless you have significant non-wage income). So, every year most people are forced to withhold too much and then wait for a refund.

2. Actually, if you know what you are doing, it is a pretty exact science. I have a budget spreadsheet that tracks everything, and I have the withholding formula built into it. Very easy to see what changing my W-4 will do, and the actual tax withheld is within rounding (a few pennies at most) of what my spreadsheet comes up with. I generally change my W-4 a couples times a year as my estimates change for things like non-wage income, itemized deductions, etc. I spend more time on it than most people, but it is possible to get it pretty accurate.

Kevin May 7, 2010 at 9:59 pm

1. I have a post coming up talking about state stuff — but interesting about your specific state.

2. Building the withholding formula into your budget is why you are a finance nerd. For a majority of people out there budgeting itself is a tremendous mountain to climb. But I suppose that was an error to say it isn’t an exact science. I should have said I was too lazy to make it an exact science!

Finance Nerd May 8, 2010 at 7:14 am

Fair point!

I certainly put more effort into mine than most people do, but I just didn’t want people to be scared off that it was a form of rocket science. It’s more about how much effort you want to put in than it is about being complex. Anyone with a high school education can understand the math, it’s just a question of whether it is worth that much effort to them.

Anyway, great post, because most people put literally no effort into this and end up giving the government an interest free loan all year, meanwhile paying interest on their debts that could be avoided if they just fixed their withholding and used the money to pay off debt.

Financialbondage.org May 17, 2010 at 5:25 am
Kym October 7, 2010 at 12:58 pm

I’d be very interested to see this spreadsheet of Finance Nerd’s. I got married this year, and both I and my spouse work. What that mean on the W4 was that we had to both drop to 0 allowances (no house or kids yet) *and* withhold another $9k per year. Just because we got married and both work. It seems really absurd to me, and has seriously slashed my paycheck. I’m hoping that come tax time, we get a huge refund, and I will adjust for 2010 based on that, but so far I followed the form W4 to the letter and near as I can tell, the government does not want both parties in a marriage to be working…and you pay dearly for doing so.

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