When was the last time you looked at your W-4? Your W-4 is the document that you file with your Human Resources department that tells them how much federal income tax to withhold from your paycheck. The form works by asking you to estimate the number of exemptions and deductions that you plan to take for the coming year. By accounting for your exemptions and expected deductions, the idea is that you will have the “proper” amount of federal income tax withheld from your paycheck. In my experience, the W-4 seems to err on the side of you paying more tax which leads to you getting a refund instead of owing money on April 15th.
Why should you review this document? It is income tax season. If you don’t know it today, you will find out soon if you owe taxes or if you will be getting a refund. This can be a very happy (or sad) day depending on the answer. In my mind, you should be sad if you are getting a refund. Why? Because regardless of whether you owe more or are getting a refund, you are paying the same amount of taxes regardless. You owe what you owe. The only difference is when are you paying the bill. Are you paying it early (through withholding) or are you paying it “on time” by sending in the final check in April?
While it may not feel as good as getting a refund, you should adjust your W-4 so that you are not getting a refund. But watch out, there are penalties if you owe too much money on April 15th. The idea is to adjust your W-4 so that you pay a small amount in April. In that way, you pay throughout the year (like you are required to do), but you aren’t giving the government more of an interest free loan than required. If you have any questions, contact your tax advisor.