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  • Writer's pictureSBS Tax and Consulting Services

Are you paying too much in tax?

Updated: Dec 7, 2021

You might be wondering why your check is so small after tax, and what can be done to change the deducted amount. Fortunately, you, as a taxpayer, have some control over your deductions.

The United States federal tax system is “pay as you go”, which means you must pay your income taxes to the IRS throughout the year, instead of paying the lump sum amount of tax due on April 15. If you are an employee, this is accomplished by your employer who withholds your income and social security and Medicare taxes from your paychecks and sends the money to the IRS. If you are an employer, you need to send the estimated tax on quarterly basis to the IRS based on your business’s net income.

If you overpaid your tax to the IRS, obviously, you will get a smaller check each payroll period and get a big tax refund when you filed your annual tax return. In effect, taxpayers who get refunds are giving the IRS an interest free loan of their money, so it is not a good idea in term of the financial prospect. Ideally, your withholding should match the actual amount of tax you owe for the year. In this way, you will have more money in your pocket.

How to change your take home paycheck?

The amount of income tax your employer withholds from your regular pay depends on the information that you provide on your Form W-4. Typically, when you start a new job, you must fill out IRS form W-4, Employees’ withholding Allowance Certificate and give it to your employer. However, you may fill out a new Form W-4 at any time to accommodate what your actual tax situation is, such as getting married or divorced, having or adopting a child, buying a new home, retiring from your job, qualifying for new tax credit, or change in the amount of income you have not subject to withholding such as interest, dividends, and capital gains.

Form W-4 includes 3 types of information that your employer will use to figure your withholding: 1) whether to withhold at the single rate or at the lower married rate 2) how many withholding allowances you claim 3) whether you want an additional amount withheld.

On the Form W-4, you fill out the number of allowances that you wish to claim. You can claim an allowance for yourself, your spouse and each dependent child. Filing as head of household can provide an additional allowance. Allowances are also available if you itemize your deduction or qualify for tax credits such as the child tax credit, education credit, adoption credit, foreign tax credit, retirement saving tax credit, child and dependent care credit, and others.

A higher number of allowance lowers the amount of withheld from your check for federal income tax. On the other hand, a lower number, down to zero, increases the withholding

How Can You Maximize Your Incentives and Reduce Your Tax?

There is no right or wrong answer by filing out your W-4 Form. If you always get a big tax refund, you can increase the number of personal allowances on the W-4 Form to have more money taken out for taxes. On the other hand, if you usually owe taxes every year, you may have to decrease the personal allowance to increase the withholding. Furthermore, you can only claim the number of allowances to which you are entitled. It will be illegal if you claim lots of allowances you don’t qualify for simply because you don’t want to have taxes withheld.

If you need help, the IRS has a withholding calculator that you help you figure how much you need to withholding. If you need to plan your tax further, you should work with a tax professional for additional advice.

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