Too Much Withholding = Free Loan to the Government

Q. I had way too much withholding last year and got a huge refund when filing my tax return. How do I change that?

A. This blog is coming from the floor of the Exhibit Hall at the American Payroll Association 2008 Congress in Austin, TX. With almost 2000 payroll folks surrounding me, I get to see the other side of your question as well. Payroll folks sometimes can’t understand why the regular employees don’t know how to manage their withholding. I’ve done a lot of discussion in past blogs on the Form W-4. This will be yet another entry on the use of that form.

When you start working for a company, they are supposed to give you a Form W-4 to complete, along with a state version (if necessary) and an I-9 form to prove your right to work in the U.S. Most employees simply fill in the number of allowances that they have for children. For example, a married individual with 2 kids would say Married – 2. This could not be further from correct. An allowance for federal withholding purposes is worth $3,500 for 2008. This means that for each $3,500 of deductions that you can claim on your tax return, you should be claiming 1 allowance. If you itemize, you may be able to claim several more allowances than you have actual dependents. The back side of the Form W-4 has a section entitled “Deductions and Adjustments Worksheet” that can assist you in getting the number adjusted right.

The key when completing your Form W-4 is that more allowances produces less withholding and less allowances produce more withholding. If you get the right number of allowances at the beginning of the year, it will not be necessary to change the W-4 frequently throughout the year. As always, check with your CPA or tax adviser for assistance with your exact situation.

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