Big Refund or Big Tax Bill May Signal Need for Adjusting Your Withholding

Are you a W-2 employee who had a huge refund or tax liability for 2010? Although, there are many factors that go into your tax return, a main cause of this may be due to your withholding being calculated wrong. You may have too many or too little exemptions depending on your other tax circumstances.

If you were a lucky taxpayer with a huge refund, you may have too few exemptions. When you filed your original W-4 with your employer, you may have not accounted for a marriage, children, or significant itemized deductions. In this instance you may want to increase your exemptions by filing an updated W-4 with your employer.

On the other hand, if you had a tax liability, then you may want to lessen the number of exemptions you claimed. This is probably due to a mistake in originally filing the form W-4. The more exemptions you claim, the less withholding is deducted from your net pay.

Another side note about withholding is if you are in a position to where you need to pay quarterly estimates, and you have neglected to for the year, you can increase the withholding to account for the tax liability. Withholding is spread throughout the whole year, unlike quarterly estimates that have specified due dates. This helps to negate penalties of not paying quarterly estimates on time. This works well for people who receive large annual yearend bonuses.

There are so many factors that go into the configuration of each individual tax return. Although, this may not apply to all, it is nice to review and update your W-4 if your 2010 return provided a large refund or liability.

Please note that his does not necessarily apply to all taxpayers, so speak with your tax advisor to see is this is applicable.