How to Minimize IRS Withholdings
Getting a big tax refund at the beginning of every year might seem like a great thing, but it actually means that you have been lending money interest-free to the government all year. It is generally better for taxpayers to reduce the amount of withholding and keep more money in their paychecks. Having the money right away, in the form of a bigger paycheck, can be much more valuable in the long run.
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Instructions
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Enroll in your company's 401(k) program if you have not already done so. The money put into a 401(k) account is withheld on a pre-tax basis, which lowers the amount of your federal taxable compensation. For example, a worker who earns $40,000 a year and contributes 25 percent to a 401(k) is taxed on an income of only $30,000.
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Increase the amount of your 401(k) contribution if you can. Increasing the amount put into the account reduces your withholding further and lowers your tax liability. Many companies offer automatic escalation plans that raise the amount of 401(k) contributions each year.
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Contact your human resources representative and request a new W-4 form; your company uses this form to determine your appropriate level of withholding, based on the number of exemptions that you claim and your filing status. Raising the number of exemptions reduces your tax withholding, resulting in a bigger paycheck.
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Monitor your potential tax bill throughout the year, using the year-to-date figures on your pay stub. Enter the salary and taxation amounts into a tax-preparation software package; use the software to estimate how much you can expect as a refund or how much you might owe the Internal Revenue Service at your next tax filing.
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