How to Adjust Your Income Tax Withholding

by Michael on Feb 18, 2013

Image of IRS Form W-4

Have you done your income taxes yet? If so, how do things look? Do you owe? Or are you expecting a nice big refund?

I ask mainly because the answer might determine whether or not you’ll want to adjust your withholding in the coming year.

If you’re receiving a large refund, the conventional wisdom is that you should reduce your withholding so you’ll be closer to breaking even. That way you won’t be giving the government an interest free loan.

Then again, interest rates are so low right now that you’re hardly missing anything by having that money withheld throughout the year. Given this, you might even decide to use your withholding as an out-of-sight, out-of-mind forced savings plan.

On the flip side, if you’re going to have to write a huge check at tax time, you might want to increase your withholding. This is especially true if you’re at risk of getting hit with an underpayment penalty.

So… How do you actually adjust your withholding? With the IRS Form W-4, of course. Simply fill out the form and file it with your employer.

To increase your withholding, reduce your number of personal allowances. To reduce your withholding, increase your allowances. These are entered on line 5.

The worksheet at the top should act as a guide, but you might want to adjust up or down depending on your reality. This is particularly true if you earn money on the side and want to avoid making estimated tax payments every quarter.

Note that you can also specify an additional dollar amount to be withheld if that would be easier for you. As for me, I’ve always just played with the number of allowances until I got it roughly right.

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