Your Paycheck

When Tax Day rolls around each April, we often find ourselves holding a fat refund check, or we’re gritting our teeth writing out a check to Uncle Sam. In most cases, your big refund or your big bill resulted from the amount of taxes withheld from your paycheck.

Did you know that you can adjust the amount of withholding on your paycheck at any time using the W-4 form? Most people fill out a W-4 when they start a new job, and never give it a second thought. You can get a W-4 from your employer, or print a copy off from IRS.gov. Here’s how to get the right amount withheld for you.

What is "just right?"

Goldilocks would know the right way to withhold taxes. Not too much. Not too little. Just right.

Believe it or not, the government actually has a way to help you get it “just right.”You can go to the IRS website, and use their withholding calculator.The calculator considers different sources of taxable income as well as credits and deductions that apply in your situation. At the end, you get a recommendation for how many allowances to claim.

How low can you go?

Don’t drop your withholding too low. While extra big paychecks might feel good now, the extra big tax bill plus penalties and interest will hurt next Tax Day. In contrast, withholding too much will get you that giant refund, but all the while the government is using your money with 0% interest.

Want that big refund for a large purchase?

Instead, discipline yourself to put money away each payday. Open a savings account funded by direct deposit from your paycheck. Refuse an ATM card, and do not link the savings account to your checking account. The money is still out of reach, but now you can earn a small return on your cash.

By withholding the right amount, you get to use your money right away instead of waiting for Uncle Sam to pay it back. Get a little extra flexibility in your finances by reducing the tax withheld from your paycheck. Just don’t get carried away, or Uncle Sam will be coming around to get what’s his.