LAST REVIEWED Apr 05 2019 7 MIN READ
By Damian Davila
During the 2016 tax season, more than 97 million out of 136.5 million individual income tax returns submitted to the IRS have received a refund so far. Even worse, the average refund has increased by 0.4% from that of last year to $2,711! That’s almost $226 per month, which Americans could have used throughout 2015 to pay down debt, build up a nest egg, or save (with compound interest!). Given that the IRS pays no interest on your refund unless it is from 2014 or earlier, there’s an additional opportunity cost. Get your money back, taxpayer! Let’s review how to plan ahead for adjusting your tax withholding in 2017 for when you file your taxes in 2018.
Calculate your withholding for 2017
Gather the following documents and data:
Most recent pay stub(s)
Most recent tax return (2015 or 2016)
Copies of payment vouchers using Form 1040-ES
Estimates of any other taxable earned income expected for 2017
Estimate of bonuses expected for 2017
Go to the IRS Withholding Calculator, where you’ll use this information to determine whether you’re underpaying or overpaying federal taxes by the time you file your return.
Here’s a tax overpayment scenario…
Let’s assume that it’s May 2017, and by your current estimates, you expect to make $60,000 for all of 2017, have withheld $3,000 in federal income taxes so far, and plan to withhold $400 from every of your biweekly paychecks for the rest of the year. If were to file your return as single with no dependents and have no other deductions or sources of income for the rest of the year, you would have an overpayment of $1,210 in next year’s return, according to the IRS Withholding Calculator. That’s an unnecessary $100.83 per month in extra tax payments.
…and an underpayment scenario
Here’s the same scenario with a twist: no federal incomes taxes so far in 2017 and planning to withhold $100 from every biweekly paycheck for the rest of the year. Under this scenario, the IRS Withholding Calculator estimates that you’ll have to pay $6,590 when you file your return in 2018. If you found out that you’re one of the estimated 71% of U.S. taxpayers that are overpaying and therefore losing out on cash that you could be using every month, it’s time to take action. If you’re underpaying, that’s a problem as well, for a different reason: getting hit with a huge lump sum tax bill next year could put a major dent in your finances.
Adjust your 2017 withholding with Form W-4 to adjust your tax payments in 2018
Whether you’re underpaying or overpaying too much, the IRS Withholding Calculator provides you clear steps on how to adjust your form W-4 to get a “Goldilocks refund” (not too big, not too small, just right). In the scenario with an overpayment of $1,210 in next year’s return, you would need to make the following changes in your W-4:
For the only job you entered (which has a projected salary of $60,000): 1 allowance.
Check the “Single” box on your Form W-4
Assuming you apply these two changes to your W-4 for the rest of 2017 and there are no changes to your sources of income or deductions, your expected refund should be about $500. In the scenario with an underpayment of $6,590 in next year’s return, you would need to make the following changes:
Enter 0 on line 5 of your form W-4
Divide $1,908 by the number of paydays remaining in 2017 and enter the result on line 6 of your Form W-4. This is the extra amount you need to have withheld each payday to ensure that you do not have too little withheld. Assuming 16 paydays remain for a biweekly pay frequency, this amount is $119
Check the “Single” box on your Form W-4
Assuming this recommendation is in effect for the rest of 2017, your withholding will approximately equal your anticipated tax, and any refund or balance due should be less than $25. Consult your HR department on available options to update your form W-4. You don’t pay any fees to adjust your withholding and can do it as many times as necessary throughout the year.
Revisit your withholding as necessary throughout 2017
From our two scenarios, you’ll realize that we didn’t include any estimates for bonuses, additional sources of income, or deductions. Whenever you use the IRS Withholding Calculator, use your most recent tax return to estimate any bonus and nonwage income payments (page 3) and deductions, such as medical expenses and gifts to charity (page 4). Make it a habit to revisit your withholding estimate whenever there are changes to your financial situation, including:
Marriage or divorce
Birth or adoption of child
Addition of a dependent
Bonus or new nonwage income
Start of a business
Major insurance events (e.g. hospitalization, theft, loss)
Purchase of real estate
Following the recommendations from the IRS Withholding Calculator ensures that the amount withheld from your wages will cover all of your projected tax liability while minimizing your refund. If your unique tax situation is complex, consult your accountant or financial advisor to have a better overview of applicable deductions.
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Damian Davila is a Honolulu-based writer with an MBA from the University of Hawaii. He enjoys helping people save money and writes about retirement, taxes, debt, and more.