When you get a new job, your employer is required to have you complete paperwork for payroll. One such form is the W-4, which determines your federal tax withholding. What many people may not realize is this W-4 form means the difference between a refund or owing the IRS money when you file your tax return.
Getting a Refund
Most people enjoy getting a nice big refund each spring from the IRS. Many use the funds to fund investments, pay off debt or credit cards, or make major purchases. However, when you think about it, a refund is actually you getting money back that was taken from your paychecks- money that you could’ve been receiving all year long.
A tax refund is essentially an interest-free loan to the US government that is being paid back to you. If you use your refund for investments or paying off debt, why not put this money to use during the year, maybe even earning interest in an account?
Why Adjust Your Withholding?
Tax situations can change yearly, but it’s probably safe to assume you don’t evaluate your W-4 each year. When your filing status changes or the number of dependents you claim changes, it affects your tax liability and therefore, your tax withholding should also change.
Ideally, you should owe the IRS as little as possible and vice versa. It may be hard to fight the habit of getting a refund, but remember this means you loaned the government your money- money that could’ve been in your pocket to start with!
This is why it’s important to evaluate your W-4 each year after you file your taxes. Ask your payroll department for a copy of your W-4 on file, and determine if you should adjust your withholding.
Gurian CPA Firm has a video coming soon to help you complete the W-4. In the meantime, take time to consider whether you prefer to receive a refund, balance your withholding, or pay tax at the end of the year. Still have questions? Contact a Dallas CPA today.
