2 Ways to Decrease Your Tax Withholding Burden

Tax withholding occurs when your employer takes out a portion of your salary from your paychecks in order to pay certain taxes on your behalf. This includes the payroll tax and income tax. The former is used to pay for your Social Security and Medicare. The later is used to fund a variety of government programs that impact citizens and residents of the United States, in general, rather than you specifically. The income tax increases in proportion to the value of your income. While you may not be able to get rid of your tax withholding burden altogether, there are a few things you can do in order to reduce it.

Fill out the W-4 Form

Ideally, the amount of tax withholding should fit your financial situation, accounting for things like the value of your wages, payment obligations and the number of dependents you have. In reality, there is always a chance that you are getting charged too much. This is especially true if your financial situation has recently changed.

You can correct this by filing a W-4 tax form. If your income for this tax year is $800 or less, filling out this form will ensure that your taxes will not be withheld. If you earn more than that, you can reduce your tax withholding amount by claiming withholding allowances. There are essentially deductions for W-4 forms. Some of the possible withholding allowances you can claim include:

  • Head of Household withholding allowance--if you are unmarried and pay over 50% of costs of keeping up the house for yourself and your dependents, you qualify for this allowance.
  • Tax credit withholding allowance--you can convert some of your tax credits into withholding allowances. First and foremost, this includes credits for health care expenses for your children, as well as other elderly and/or disabled relatives who you take care of. It also includes the education credit, adoption credit, foreign tax credit and earned income credit.
  • Single employer withholding allowance--if you have only one job, you will be able to claim this allowance. This will not work if you have a working spouse. If you do have a working spouse or if you have multiple jobs, you may be able to get smaller, but nonethless worthwhile allowance based on the highest source of income available.

Once you filled out W-4, you must turn over a copy of it to your employer. The employer will then have to adjust the the amount it will withhold. If you claim more than nine withholding allowances, your employer has the right to send your W-4 form to IRS for review. If IRS accepts it, your tax withholding burden will be lowered, but if it doesn't, you will be stuck with your tax burden until the next tax year.

Fill Out a W-8BEN Form

If you are a foreign national who receives income from an American company and your country of birth has an income tax treaty with United States, you can reduce your tax withholding burden by filling out form W-8BEN. Once you fill out the form, you must give it to the withholding agent such as a stock broker, not the IRS.

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