Posted On: 2007-02-06Length:
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Hello and welcome to Money Girl's quick and dirty tips for a richer life.
Today's topic is how to adjust your withholding. Now wait. Don't yawn just yet. This topic might really sound dry and boring, but hang in there and just listen because it can put more money in your pocket today and save you from making a free loan to Uncle Sam this year. One exception: if you're not an employee and don't have taxes withheld from your paycheck, this episode doesn't apply to you. But you might want to keep listening anyway so you can tell your employee friends.
Most people pay the bulk of their income taxes through payroll withholding. If you don't have enough withheld in your pay, you could end up owing the IRS when it comes time to files taxes. In some cases you might even end up having to pay a penalty and interest for underwithholding. And, if you withhold too much, you'll get a refund check after you file your taxes. While it might feel really good in the moment to get a refund check, remember that the check means you made an interest-free loan to Uncle Sam. You could have kept that cash instead and invested it so you'd earn some interest on it. If you haven't done it already, it's a good idea to check your withholding for 2007 and adjust it up or down as needed. You can adjust your withholding at any time. If you know you'll owe a lot in taxes for 2006, and your tax situation is similar this year, adjust your withholding down. On the other hand, if you know you'll get a big refund for 2006 and your situation for 2007 hasn't changed much, you'll want to adjust your withholding up. You'll also want to adjust your withholding if you recently got married or divorced, had a baby, or bought a house.
So how do you adjust your withholding? What you need is a W4. Your employer's payroll department should be able to give you the form. You can also find it on the IRS website and a link to a blank W4 is provided at the end of the transcript for this episode, at qdnow.com. The form looks kind of intimidating, but adjusting your withholding is pretty straightforward. If too much tax is being taken from your paycheck, increase the number of allowances on your W4. If too little is being withheld, reduce the number so you won't have a big surprise tax bill for 2007. The IRS website has a withholding calculator that's easier to use than the W4. If you want to check it out, you can find a link to that too at the end of this episode...