If you overpaid or underpaid your 2007 federal or state tax, then clearly you need to adjust your 2008 withholding. You can also change your withholding now to take advantage of deductions you won’t be eligible for until later in the year.
Last year, my husband and I wildly underwithheld both our state and federal tax because our income doubled after I finished grad school and returned to work, but we failed to do the math. We corrected the situation by having extra money withheld in December, but it was annoying to scramble at the end of the year. This year, we’ve already calculated what we will probably owe using the IRS tax withholding calculator and filed new 2008 W-4s for the correct amount. Then we’ll file quarterly payments if we get any unexpected money. We tried to do California, too, but their calculator is confusing, so we’ll just fix it at the end of the year if it’s wrong.
If you receive a sizable refund every year, then you’re overpaying. You should also adjust your withholding to the proper amount. Use the calculator to find it and then submit a new W-4. That way you’ll have access to the extra money all year long.
Adjusting for Future Deductions
Life changes can also have a huge impact on your taxes next April, but you can take advantage of those changes now by adjusting your withholding. For example, if you’re pregnant now, re-run the calculator with the additional dependent included. If your child is born by December 31, the IRS assumes it’s lived with you for the whole year. If you’ll be closing on a house soon and know how much interest you’ll be paying for the rest of the year, you could also adjust your tax withholding now to include the new deduction.
Basically, any deduction you’ll have on your taxes for next year can be factored in now to reduce your withholding to the proper amount. That includes:
- Tuition deductions
- Childcare expenses
- Mortgage interest
When you experience life changes throughout the year, like a new job or financial windfall, you should also double-check the calculator to confirm that your withholding is still correct. The sooner you get it right, the more money you’ll have throughout the year.