It’s tax filing season in America and given the new tax laws that were effective in 2018 there’s a lot of news about filings and refunds. Many headlines are making hay of the smaller tax refund amounts seen so far. [Note: The amount of your refund is not the amount of tax you pay.]
Here’s an example article from yesterday from Forbes:
“As Tax Season Rolls On, IRS Still Reporting Fewer Returns & Smaller Refunds“
If you are an employee and receive a W-2 with your wage earnings at the end of the year you can take action now to increase your refund in 2019.
Form W-4 is the IRS form you fill out when you start a job and it tells your employer how much to withhold for taxes from your paycheck. It’s a short, simple form but has a big impact on how much of your paycheck is paid to the government during the year.
The form is mostly your personal info – name, SSN, address. Easy enough. The important parts for the amount of tax withholding are Line 5 and Line 6.
Line 5 – How many allowances you’re claiming. Basically how many people will be on your tax return, usually how many people are in your household. The smaller this number is, the larger the taxes withheld. Entering 0 yields the largest withholding.
Line 6 – You can choose an additional amount to withhold on top of the amount determined by the Line 5 Allowances. $100, $500, or whatever number you want to enter will increase your tax withholding. The bigger this number is, the larger the taxes withheld.
If you want to increase your tax withholding, and most likely your tax refund, in 2019 simply complete Form W-4 and send to your company payroll or HR department.
There’s a debate about whether receiving a refund is a good thing or bad thing. Many, like this Motley Fool writer or this article from US News, think refunds are bad – an interest free loan to the government. I mostly sit on the side of refunds being a good thing. This is primarily because as a CPA I’ve seen people have to deal with a $5,000 tax bill as well as a $5,000 tax refund. It’s typically much easier to deal with a large windfall rather than a large amount due. I personally like to have high withholding because it helps to cover taxes due from side hustle / self-employment income that can be tedious to separately calculate and remit during the year.
However you feel about refunds, if you do want to alter your withholding the simple steps above should help you do it. Cheers.
Note: The content of this post is for informational and discussion purposes and is not financial or tax advice. Consult with an advisor before relying on this or any information.