Extra Tax Withholding, Is It Worth It?
When filling out a standard W4 form, there is always the ability to withhold an extra amount of cash from each of your paychecks. Until now, working at part time jobs, I needed as much of my money as fast as I could get it, and I simply ignored the field.
Now, however, I'm at a point where I could spare a few dollars each check and I'm wondering if there is any value in doing this.
Does this amount help with anything in particular? If I choose to do this, can I at some point in the future stop having this extra amount withheld?
All answers are greatly appreciated.
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Some people withhold extra as a way of forcing savings -- they expect to get a big tax refund back in the spring of next year. Withholding more than the government is due is giving the government an interest-free loan. Remember that you get back exactly the amount over-withheld, and not a penny more.
I'm "over-withholding" because I have significant income from non-salary sources most years, and it's easier for me to simply have a bit more taken out of the paycheck than to file Estimated Taxes.
Do you anticipate owing income tax this year? If so you may want to increase the amount withheld. You can do this with a combination of reducing deductions and using the additional withholding. Owing more then 00 could induce some penalties.
Do you anticipate receiving a refund this year? If so you are far better saving the money then giving it to the government to hold. In fact you may want to increase your exemptions if your refund was large (over 00)
Using a paycheck calculator and the anticipated tax forms from the IRS can help you figure the right mix of exemptions and additional withholding. I'd shoot for a zero refund as laws can change that can cause some fluctuations.
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