Calculate Your Withholding
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April 15. Mere mention of the date strikes fear into the heart of many Americans. But the truth is, you pay most of your tax in regular increments throughout the year. It's withheld by your employer, based on the number of allowances you claim on form W-4 (Employee's Withholding Allowance Certificate). If you've calculated your allowances correctly, you should owe very little at the time you file your return.
By the same token, you shouldn't be looking for a mammoth refund, either. Sure, a refund can be a nice surprise. But it's the equivalent of an interest-free loan to the IRS. You could probably think of better uses for your money, like investing it instead. So it pays to have the right proportion of your earnings withheld.
That amount will change, depending on your life's circumstances. If last year you received a big refund or owed more than you were expecting to pay, or if you've gotten married, divorced or had a child, you'll want to recalculate your withholding this year. Similarly, if you've made a hefty profit selling investments, your W-4 should reflect that. If you don't change your withholding, you might be required to pay estimated tax. See our story "Do You Owe Estimated Taxes?" for more information.
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For help figuring the number of allowances you should claim, use the Withholding Allowance Calculator on the IRS Web site. And for more details on the subject, read what the IRS has to say in Publication 505, "Tax Withholding and Estimated Tax," and Publication 919, "How Do I Adjust My Tax Withholding?"
Need more motivation for accurately calculating your withholding? While the IRS doesn't pay interest if you overpay, they'll hit you with a penalty if you underpay during the course of the year. If the tax you have withheld is less than 90% of your total tax bill, you might find yourself paying interest and an additional fee.