The amount of tax you elect to have withheld during the year has a direct effect on your tax outcome. If you don’t have enough money withheld, you will owe additional tax to the IRS when you file your return. If you have too much money taken out, however, you will get a refund, which isn’t the best outcome either. Receiving a refund means that you have essentially given the government an interest-free loan of money you could have invested elsewhere.
According to tax experts, the best course of action is to adjust your withholding so that the amount of tax withheld is as close to your actual tax liability as possible. To adjust your withholding, you must complete and submit an updated version of Form W-4.
Form W-4 is a form you must submit to your employer when you begin a job. The information on the form tells your employer how much money to withhold from your paycheck and send to the IRS. On Form W-4, you will find a worksheet you can use to determine how many allowances you should claim, as well as a worksheet for deductions and adjustments.
To change the amount of money your employer will withhold in the following tax year, simply complete a new copy of this form with the correct amount of withholding indicated. For example, if you owed additional money with your tax return last year, prevent the problem from occurring again by adding a value to Box 6, “additional amount, if any, you want withheld from each paycheck.” Alternatively, if you received a refund and don’t want to receive another, consider increasing the number of allowances you are claiming to reduce your withheld tax.
If you have no tax liability and expect to receive a refund of any tax withheld, write “exempt” in Box 7 to discontinue all withholding.