Are you giving Uncle Sam an interest-free loan? Why it may be time to adjust your W-4

Tax Form 1040

If you find yourself strapped for cash during the year, yet you always receive a refund come tax time, it might be time to adjust your W-4 exemption. And with the holiday season right around the corner, who couldn’t use a little more cash in their pocket?

As of February 2015, the Internal Revenue Service reported that 50 million individual income tax returns had been filed for the 2014 tax year. Some 83 percent of those resulted in refunds averaging $3,120.

If you’re among those who received a sizable refund, you essentially gave Uncle Sam an interest-free loan last year, and — based on that $3,120 average — shorted your cash flow by approximately $260 a month.

Whether you’re having too much — or too little — withheld, the IRS offers a tool that can help you calculate the proper federal tax withholding.

You can also consult your tax preparer, or tax-preparation software packages like TurboTax to see what changing your W-4 would mean to your pocketbook year round, and at tax time.

Regardless of your current tax liability, there are 3 life changes that should always warrant an examination of your tax exemptions:

  1. You gain, or lose, income: Whether you’ve added a second job, gotten a significant raise, or become unemployed, you’ll need to take stock of your exemptions. When your income increases, so does your tax liability. If you launch a home-based business or add a part-time job, it’s a good time to take stock of your exemptions. Conversely, if you spend a chunk of the year unemployed you may have had too much tax withheld. And when you rejoin the workforce you’ll need to account for downtime.
  1. Your joint filing partner gets a new job: Any time household income changes, you could unwittingly enter a new tax bracket based on combined income figures. One filer can claim all of the allowances or they can be split between both.
  2. You get married, divorced, or become a parent: Married, joint filers qualify for a lower tax rate and other standard deductions. A divorce means a return to single-filing status, which disqualifies you from a number of tax breaks. A new child, meantime, qualifies as a major tax event and qualifies you for the Child Tax Credit and Child Care Tax Credits, among others. These added tax benefits can allow you to reduce your withholdings.

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