Thursday, May 9, 2013

Adjusting Your W-4 for the 2013 Tax Year

If you had to make a large payment to the IRS for the 2012 tax year or received a large refund, you might want to make some adjustments to avoid a similar situation happening in 2013. 

While it’s very nice to receive large refunds, it’s not the best use of your money.  When you get a large refund, it means you’ve given the government free use of that money for the year.  With very little effort, you should be able to find an investment that would pay you more than zero percent on the same money.

The fix to adjust your withholdings is extremely simple if you are a W-2 employee.  Simply complete a new W-4 payroll withholding form and either increase or decrease the number of allowances you are claiming.  The more allowances you claim, the less tax will be withheld.  The fewer allowances you claim, the more tax will be withheld.  Some basic guidelines are as follows:

·     If your tax due or refund was $1,000 or less, you don’t need to make any changes.  Fluctuations in income or circumstances from year to year make this a great place to be.

·     If your tax due or refund was between $1,000 and $2,500, you might want to change your allowances by one up or down. 

·     If your tax due or refund was between $2,500 and $5,000 you might want to change your allowances by two up or down.
Don’t forget that if you are making corrections now, you’ve missed the first four months of the year and may need to increase your correction to make up for those months.  It would be a good idea to talk to your tax professional to get a clear idea of the best strategy for your particular circumstances. 

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