How to Reduce the Taxes Taken Out of Your Paycheck
By Susan Landis-Steward
, last updated January 10, 2012
Whether you want to resist war taxes or simply increase your monthly take home pay, there are ways to reduce the amount of tax that is withheld from your paycheck. It's simple to do, but you should be aware that you may end up owing money when tax time rolls around. If you're okay with that, then feel free to change the amount withheld.
When you start a new job, you're asked to fill out a W-4, an IRS form that lists your withholding allowances and that your employer uses to figure out how much tax to withhold. You can change this form at any time, simply by going to your human resources office of payroll department and filling out a new one. Don't think of withholding allowances as dependents. They're not the same thing. You do get an allowance for yourself and for all your dependents, but you can also take them to cover things that you plan to deduct on your income taxes. These include things like charitable gifts, the cost of child care, mortgage interest, retirement contributions, and alimony payments. Instead of waiting for an income tax refund, you can take the money now, in your paycheck, by changing the number of allowances on your W-4.
However, you are responsible for the allowances you claim and if you can't pay your taxes when April 15th rolls around, you will be subject to penalties and fees. If you are planning to withhold as a protest against war taxes, you are probably prepared to face the fact that you could go to jail for not paying your taxes. However, if you just want to have more cash in your paycheck, you want to come out as close to zero as possible when you file your taxes or you'll have to come up with the money.
If you're employer is curious about why you are claiming so many allowances, you don't have to tell them. It's none of their business, and they should not ask. By asking they are expecting you to lay out details of your personal finances that you should not have to reveal. The IRS can, however, ask your employer to submit questionable W-4s if they suspect something is out of place. Before April 14, 2005, employers were required to send any W-4 with 10 or more allowances claimed to the IRS as a matter of course. Now they only have to do it if the IRS sends them written notice.
If the IRS suspects that you are seriously under withholding without a good reason, they can send a "lock-in" letter to your employer and force the employer to withhold at a more appropriate rate. Your employer will notify you and you will be given a date by which you can either verify your allowances to the IRS or appeal. If the IRS disallows your allowances, your employer will have to withhold the amount specified in the "lock-in" letter or they may face penalties. Once this happens, you can no longer fill out a new W-4 and submit it to your employer; all future W-4s must be submitted to the IRS for their approval.