In order to give you a head start on tax season, we are offering you some helpful tax hints.
This week, we are talking about W-4s--where the taxes begin.
Every time you earn an income, you more than likely will owe taxes. The amount of taxes you withhold is determined by your Form W-4. This tells your employer how much to deduct based on your number of allowances you claim on your W-4. You need to pay attention to this number so you don’t have too much or too little tax withheld.
When you have too much money withheld, you end up giving Uncle Samyour money as an interest free loan – yes, you get a refund, but wouldn’t it be better if you kept that money and invested it yourself?
On the other hand, you do not want too little withheld because you put yourself at risk to owe money and possibly pay penalties.
The key to paying the correct amount of taxes: Update your W-4 form regularly. You need to do this when you have major life changes (i.e. divorce, parenthood, marriage, etc.). Your goal is to reduce the potential for a tax bill, and to have your tax refund as close to zero as possible. However, if you do count on a big tax refund every year, you should also pay attention to your withholding because how much you have withheld directly impacts your refund.