Tweak Your Income Tax Withholding

Avoid paying more or less tax than you owe

A couple sitting together on a couch with paperwork in front of a laptop that's resting on one person's lap
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When tax season gets underway, you're probably wondering whether you'll owe money this year or if you'll snag a large refund. The deductions or credits you claim can determine your tax liability, but it's also influenced by how much in the way of taxes you elect to have withheld from your pay by your employer. 

Having too much or too little tax withheld can have different but significant consequences, so it's important to ensure that you get your tax withholding just right.

Key Takeaways

  • It's a good idea to review your tax withholding at the beginning and end of each tax year.
  • Withholding too much tax may result in a large refund, but that money could earn interest instead if you saved it.
  • Withholding too little tax can lead to a big tax bill or even an underpayment penalty when you file your return.
  • You can adjust your tax withholding by filing a new Form W-4 with your employer.
  • The Internal Revenue Service (IRS) provides a free tool to help you calculate the appropriate amount of taxes you should have withheld from your pay.

Why Tweak Your Income Tax Withholding?

Inaccurately completing your Form W-4 can result in underpaying your taxes for the year if you don't have enough withheld. You'll end up owing the money in a lump sum when you file your tax return. But you'll end up lending Uncle Sam your money interest free if you overpay in tax withholding. That's not as bad as ​owing, but why give up the interest on your money and the use of it during the year?

Some People Prefer Getting a Tax Refund

Tax withholding is a type of forced savings account for some people. The money is withheld until they file their tax returns, then they receive it all back in a lump sum in the form of their tax refund, rather than receiving it in their regular paychecks.

Getting the money back as a refund may be appealing if you have large expenses that are typically due around tax season, or if you're worried that you might spend the extra money frivolously if you receive it in each paycheck during the year. But there are better ways to make your money work for you than simply waiting for a tax refund in April.

An Alternative That Pays

It may benefit you more to adjust your withholding and have the extra money taken out of your paycheck or bank account automatically each pay period instead and transferred to a savings account.

Note

Those regular deposits can grow more quickly over time compared to a traditional savings account If you keep the money in a high-interest savings account rather than a traditional savings account.

Try tracking every penny you spend for a month. You'll likely be surprised (if not appalled) at how much seemingly inconsequential amounts that you spend can collectively add up to.

Those automatic savings deposits could help you build an emergency fund, set aside money toward the purchase of a new car, plan for a dream vacation or wedding, or put together a down payment on a home. When savings has an assigned goal and assigned place (such as your savings account), it's much easier to stay on track.

Changing Your Withholding

The beginning and end of the year are ideal times to review your strategy to ensure that your Form W-4 is still accurate. But you can check and change your withholding periodically throughout the year to make sure you're not paying too much or too little in taxes.

Use a Tax Withholding Calculator

Your withholding is based on your filing status, your income, and whether you have any dependents that you claim on your tax return. A relatively easy way to calculate your appropriate withholding is to plug the numbers into a tax withholding calculator.

Note

The IRS has a tax withholding estimator tool you can use to help ensure your withholdings are appropriate.

It's particularly important to revisit your withholding if you've undergone any significant life changes in the past year, if you owed taxes, or if you got a large refund. Complete a new Form W-4 and submit it to your employer if any of the following situations apply to you:

  • You got a big refund last year.
  • You had a major lifestyle change, such as getting married, divorced, or having a child.
  • You had a major financial change like switching jobs, loss of employment, or you began working a second job or a side gig.
  • You can no longer claim a dependent you claimed last year.

The Marriage Tax Penalty

Remember that you may have to account for the "marriage tax penalty" when you're determining your withholding if you're married and if you and your spouse both work.

When married couples who file a joint return owe more taxes than two unmarried persons with the same individual incomes would owe, the higher tax liability is often called the "marriage penalty." Whether you're subject to the marriage tax penalty depends largely on your income. Depending on your situation, you may actually benefit from filing jointly. This is known as a "marriage tax bonus."

The Tax Cuts and Jobs Act (TCJA) preserved the marriage tax penalty when the legislation went into effect in 2018, but only for the highest earners. It only impacts married couples filing jointly with an income of $622,000 or more.

Note

Filing separate tax returns could allow you to avoid the marriage tax penalty, but it may make you ineligible to claim certain tax credits or deductions that could otherwise reduce your tax bill.

If You've Underpaid Your Taxes

Don't panic if last year's withholding election has resulted in an underpayment of taxes for the year. You have until the April filing deadline to pay the balance owed before interest and penalties begin to accrue. The IRS offers an installment agreement for taxpayers who need a payment plan to satisfy their outstanding tax bills.

Your other option is to use a credit card or personal loan to pay your tax bill if you'd rather not owe any money directly to the government. Look for a credit card that offers the lowest annual percentage rate possible. This is especially important if you won't be able to pay the balance in full right away. Also, be aware that credit card payment processors will charge a fee, usually a little under 2%, for passing along your tax payment to the IRS.

Frequently Asked Questions (FAQs)

How do I calculate my federal tax withholding?

Your employer will withhold taxes from your paycheck. The easiest way to calculate the correct amount of tax that needs to be withheld is by using the Tax Withholding Estimator tool on the IRS website.

How can I adjust my federal income tax withholding?

File a new Form W-4 with your employer to inform them of any changes to the taxes they withhold from your paycheck. This is typically necessary when you undergo major lifestyle changes like marriage, divorce, a new child, or major financial changes.

 

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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. IRS. "Publication 505, Tax Withholding and Estimated Tax."

  2. Tax Foundation. "What Are Marriage Penalties and Bonuses?"

  3. IRS. "Publication 501, Dependents, Standard Deduction, and Filing Information."

  4. IRS. "Underpayment of Estimated Tax by Individuals Penalty."

  5. IRS. "Pay Your Taxes by Debit or Credit Card."

  6. IRS. "Tax Withholding Estimator."

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