Many taxpayers receive moderate to large refunds from the IRS each year, and one of the more common reasons for this is when withholdings are established too high. Most taxpayers enjoy receiving a refund, but it often is preferred to receive slightly higher paychecks so that you can enjoy access to the funds throughout the year. When you first start working for an employer as well as at the beginning of each subsequent tax year, your employer likely asks you to complete a new W-4 form, and this form is where you indicate the number of withholdings you want to claim. With a closer look at how withholdings are calculated, you can better determine if you need to adjust your withholdings.
One of the first factors to consider when determining your number of withholdings is how many people you will claim as dependents on your tax return in the following year. You may claim one allowance for yourself, one for your spouse if you are married and one for each additional dependent, such as a child or an elderly parent living with you.
You also may claim additional withholdings for other factors. For example, if you plan to file your tax return as the head of the household, you may claim an additional allowance. If you have dependent care expenses, such as daycare expenses if you work full-time, you may claim another allowance. An additional allowance may also be claimed if you will receive a child tax credit.
Up to this point, counting allowances for withholdings is fairly straightforward, but this process can get more complicated as you dig deeper into your tax return. For example, you may also have a second job where you are claiming withholdings, or your spouse may be working. His or her income as well as claimed deductions also need to be taken into account. Paying alimony, paying student loan interest, making retirement account contributions or receiving other tax credits may also change your number of withholdings.
If you have a straightforward tax return, the number of withholdings is easy to calculate. You can compare your withholdings last year with the amount of your refund to determine if you want to claim an additional allowance or not. However, if you have a complicated situation because of retirement account contributions, a working spouse or other factors, it may be helpful to consult with your accountant or to use an online withholdings calculator to arrive at a reasonable number.