Taxpayers Should Check, Revise Withholding Before Year-End
The odds of your withholding exactly matching the amount of tax computed on your tax return are extremely slim. Unless your taxable income can be determined in advance, to the dollar, and your withholding calculated to coincide with the amount of tax due, or unless you are a citizen whose income is low enough that you pay no taxes, chances are you will either owe tax or be entitled to a refund when the annual income tax returns are filed in April.
For most taxpayers, tax time brings a refund. Last year, more than 90 million taxpayers received refunds. And for the most part, the refunds aren't small. The average refund last year was $1,743.
Many taxpayers enjoy receiving the refund in the spring and look at the payment as a windfall or method of forced savings. But at zero return on investment, this method of savings is not considered to be the wisest use of discretionary funds. And some taxpayers could really use the money during the year instead of waiting until the spring for their bonus.
The excess withholding is yours and you have the right not to have it withheld from your paycheck. You can change your withholding so that less money is withheld during the year so that you have the use of your money when you earn it, either to pay necessary expenses, invest in interest-bearing accounts, or fritter away as you see fit.
Use the IRS's withholding calculator to figure out what you can expect in a refund for 2002. If it you expect a refund for 2002 and you don't want to wait until Spring of 2003 to receive the money, you can adjust your withholding for the rest of the year so that less is withheld.
Fill out IRS Form W-4, Employee's Withholding Allowance Certificate, and turn in the form to your employer to request a change in withholding. Keep in mind the fact that your employer may need some lead time to put the new withholding in place. A change in withholding that you request today may not take place for one or two pay periods. The earlier you make your request, the more time your employer has to institute the change.
Remember also that the change you make now for 2002 taxes may not be applicable for 2003. Reassess your withholding in January and, if necessary, file a new Form W-4 for 2003 tax withholding. If you have questions about the way withholding is computed or if you're not sure what type of a change to make on your W-4 form, ask the payroll manager at your company for suggestions.