I figured with tax season kicking into gear it would be a good time to post an article to help people change their payroll tax deferrals to get them closer to what they should be. Personally, I would rather have as much of my money coming my way as possible. I don't want to loan the government my money interest free, which is basically what you are doing when you get a tax refund.
Now, when you get ready to start this process you will need the following pieces of information:
- Your most recent pay stub
- Your most recent tax return
Note: The calculator will ask if you are participating in any tax-deferred retirement programs, these are typically your 401(k) plan or 403(b) plan if you work for a non-profit, etc. It will also ask if you are participating in what is typically called a cafeteria plan, which would be your health savings account, flex spending account, various insurance programs, and transportation spending accounts. There are links on the site that will provide more detailed descriptions.
You will be able to tell if you are participating in these programs based on the deductions on your pay stub, but if you aren't sure I would suggest looking at the last few pay stubs to see if any deductions are being taken out because some employers may only handle deductions on a monthly basis.
Once you have these forms you can use the link below to go to the IRS website and they have a useful calculator that will take you through the necessary steps to help you determine how much to withhold. Once you complete the calculations you will want to get a new IRS Form W-4 from your payroll or HR department to update your withholdings accordingly.
If you make any changes throughout the year, such as changing your 401(k)deferral rate you will have to go back and run the calculations again to get your updated withhold amount to use to complete a new W-4.
While many people love the idea of getting a nice fat refund check when they file their taxes, they are missing out on the things they could do with that money if it went into their wallet instead of the federal government's account. They could build an emergency fund or invest it. Now, if you think the extra money will just be spent frivolously, and you would be more likely to do something smart with your refund, then by all means keep things as they are. You could even run the calculations above and make sure more is taken out if this is a way for you to force yourself to save.
Disclaimer: Even though I am an accountant, I am by no means a tax expert so please make sure to read the instructions on the IRS website when using the above calculator to make sure you are following all of the steps properly and considering your own unique situation.