Making tax withholding changes can boost your paycheck now
Q: This past tax season, I received a big refund, which I understand is an interest-free loan to the federal government. Is it too late to prevent that from happening again?
A: Look at your last paycheck and see how much federal income tax has been withheld from your wages so far this year. If you’ve had too much withheld, there’s still time to change your tax withholding for the rest of the year (and beyond). But since you probably only have a couple of pay periods left this year, you need to act as soon as possible to have an impact on your overall 2022 withholding.
The goal is to have your annual tax withholding be as close to your overall tax liability for the year.
Reducing your tax withholding will immediately boost your paycheck (it’s like giving yourself a raise). And, yes, next year’s tax refund will be smaller, but that just means you’re not letting the government hold on to and use your money for a few months (again, without paying interest).
There are many reasons why your tax withholding could be a bit off. Common causes include marriage, divorce, birth of a child or home purchase during the year.
If it looks like your 2022 tax withholding is going to be too high, you can submit a new Form W-4 now to decrease your withholding for the rest of the year. Give the new form to your employer, and they’ll take it from there (check with your HR department to find out exactly who you should send the form to). Your employer must implement any change by the start of the first payroll period ending on or after the 30th day after you submit a new W-4 form for this year.
Although there are five “steps” on the W-4 form, only Step 1 (name, address, Social Security number and filing status) and Step 5 (sign and date) are required for everyone. You only have to complete Steps 2 to 4 if they apply to you (e.g., you have more than one job, a spouse that works, dependents or other adjustments). Completing all relevant steps will bring your tax withholding closer to your tax liability, which is the goal.
To help you determine if and/or how much to adjust your 2022 withholding, use the IRS’ Tax Withholding Estimator (https://apps.irs.gov/app/tax-withholding-estimator) as soon as you can. Have your most recent pay stub and a copy of your 2021 tax return handy to help estimate your 2022 income.