Don't Mess With Taxes

All U.S. workers know, simply from looking at their pay stubs, that our tax system is pay-as-you-earn.

Our taxes come out of our paychecks as withholding, both for federal income taxes, as well as to cover future Social Security and Medicare benefits.

We don't have control over those taxes we pay now for federal retirement and hospital coverage when we're older. But we can — and should — adjust our income tax withholding if there are changes in our lives, such as marriage or a family addition or home purchase that can affect a tax bill, or we're getting a big refund or paying a tax bill every filing season.

Why withholding is important: Obviously, owing Uncle Sam when you file your Form 1040 is not fun. But if you don't have enough withheld from your pay, that's what will happen.

And while a tax refund, which is what you'll get when you have too much withheld, is nice, sometimes refunds are delayed.

The Internal Revenue Service has added new steps in processing returns and refunds in its continuing effort to fight tax identity theft. These can slow down the issuing of refunds.

And if you claim the Earned Income Tax Credit or Additional Child Tax Credit, federal law now requires that the Internal Revenue Service hold your money until at least mid-February.

So instead of letting the U.S. Treasury hold onto your money — emphasis on your — for more than a year (without, by the way, paying you any interest on it), adjust your withholding so that it comes as close as possible to what your actual tax liability will be.

Doing so will mean you get your tax money throughout the year in your paychecks, not just when you file your return.

How to change your withholding: OK, you've decided that you do need to adjust your withholding. It's easy.

You simply file a new W-4 with your employer. Usually, this is a change in the number of allowances you claim. You also can enter a specific added withholding amount you want taken from your check. Any change you make on your updated W-4 will change the amount that comes out of your paycheck.

If you're a paper person, the W-4 has a worksheet that helps you determine just what changes you need to make to your withholding.

The easier option, however, is using the IRS' interactive withholding allowance calculator.

Regardless of which W-4 calculation method you choose, have handy your most recent pay stub, your most recent income tax return and any estimated values of tax situations, such as mortgage interest that can claim as an itemized tax deduction or non-wage income like investment earnings, that might reduce or add to your tax bill.

The more data you have, the better your final estimate will be in helping you arrive at the best withholding amount.

What to do with more money: Many folks view over-withholding as a handy forced savings account. I get it. Sometimes it's way too easy to spend money you have in hand.

If you're afraid (know) you'll blow the extra cash when you adjust your withholding, there are ways to avoid wasting that new money.

Keep it at work. If your employer offers a 401(k) plan and you're participating, simply up your contribution amount to that retirement savings to account for the reduced tax withholding amount. Or use the withholding amount to start putting money into a 401(k). That way the money goes directly into this savings plan and could even mean added match money from your company.

If you'd rather have easier, but not immediate, access to the added pay you're getting from your adjusted withholding, set up a direct deposit account at your bank or credit union and have the amount that used to go to taxes go instead to this fund. There you will earn some interest and, depending on the type of account, can get to the money quickly if you need it for an emergency.

Either way, your pay amount will be the same as it was, but now you'll be getting your money each payday instead of having it held by the federal government until next filing season.

You also might find these items of interest:

• 5 tax refund myths busted
• Tax refund recipients say they'll save, pay off debt
• Savings bonds' tax advantages and as a refund option