Updated for tax year 2017
Every year millions of Americans jump for joy when they receive their tax refund from Uncle Sam. And, rightfully so. There’s nothing better than feeling a bit more financially secure when you see that “extra” cash hit your bank account.
But, what you may not realize is that “extra” money was already yours. That’s right – the money you receive in a refund is money you overpaid to the government all year long in the form of taxes. It’s money that originally came from your paycheck.
Fortunately, you don’t have to wait until tax season to get that money back. You have the power to control how much you pay in taxes by adjusting your tax withholdings. If you find out you owe taxes, read our guide on why you owe taxes.
Curious how that works? Here are two quick steps to take.
1. Get familiar with Form W-4.
To control your tax withholding and paycheck, you need to adjust the number of allowances (withholding exemptions) you claim on Form W-4. If you’re unfamiliar with Form W-4, it’s the tax document you complete each time you start a new job to let your employer know how much money to withhold from your paycheck for federal taxes. To better understand how allowances work, think about it this way:
- to increase your paycheck – claim more allowances to withhold fewer taxes
- to increase your refund – claim fewer allowances to withhold more taxes
With one simple form, you can make the necessary adjustments to keep more money in your paycheck instead of waiting to receive it in the form of a tax refund. Take a moment to review your withholdings along with your current financial situation. Is it better for you to receive a larger refund or would additional money in each paycheck be more useful?
2. Assess your recent life events.
As life changes, so do your taxes. Any time a major life event occurs, you should review your current withholdings on Form W-4 to ensure the right amount of tax is withheld from your pay. For example, did you start a new job this year or get a pay raise? A change in household income can impact your tax situation, and you may want to modify your allowances to account for that adjustment.
Saying “I do” can also affect your tax rate, especially if you and your spouse are both employed. Filing a joint return can lower your tax rate and qualify you for deductions you didn’t have as a single person.
A new baby is also a major life event that influences your tax situation. Not only can you claim an additional allowance for your new dependent, you may also qualify for various credits, like the Child Care Tax Credit and the Child Tax Credit. Both of those decrease your tax liability. If your withholdings remain the same, you may receive a larger refund, but you will miss out on extra dollars in your paycheck to cover the costs of added expenses, like diapers and formula.