For most Americans, tax withholdings are something that you think about when you start a new job and then rarely reconsider. But the withholding you choose can have an enormous impact on your finances when it comes time to file your taxes; specifically, whether you give money to the IRS after filing or you get money from the IRS after filing. That’s because your employer withholds a portion of your gross pay from each paycheck and sends that money to the IRS — and the amount they withhold and send is based on the tax withholding you set up. If the taxes withheld are too little, you’ll owe. If your taxes aren’t withheld at all — as might be the case, for example, if you’re self-employed — you’ll need to pay estimated taxes throughout the year.
It’s important to set your withholding rate so it covers your full tax liability for the year. When the new tax code went into effect in 2018, it may have dramatically altered your tax liability. If you didn’t quite hit the tax withholding sweet spot last year, you’ll want to tweak your withholding this year to make your estimated tax payments more accurate.
Changing Your Withholding Through Your W-4
To change how much is withheld from every paycheck, you’ll need to change your W-4 form (which your employer can provide). You can file a new W-4 form with your employer at any time. The W-4 uses two factors to determine your appropriate withholding rate: your marital status and the number of allowances you claim. In theory, you can claim as many allowances as you like, and each one reduces the amount your employer will withhold from your paycheck.
The standard deduction is now $12,950 for single taxpayers ($25,900 for joint filers), which has made up for the loss of the personal exemption for many people.
Meanwhile, the child tax credit in 2022 has everted back to its original limit of $2,000 per dependent child under the age of 16. In 2021, the expanded child tax credit was worth up to $3,600 per dependent based on income levels.
Update Your W-4
If you received a large refund last year, you may want to increase the number of allowances in your W-4 this year. If last tax season came with a surprisingly large tax bill, decreasing the number of allowances in your W-4 will lead to a greater withholding.
A version of this article appeared in our partner magazine, The Essential Tax Guide: 2023 Edition.