If you’re employed, there is something quick and easy you can do to correct these situations. You can actually request that your employer make changes to your federal tax withholding (i.e. how much of your earnings they keep to pay your taxes).

In this post we’ll look at how to adjust those federal tax withholdings before you forget. This way, you wont’ end up owing too much (or getting too much back) next year.

How Federal Tax Withholding Works

Here in the U.S., the government has decided that it is best if employers be given the duty of collecting federal income taxes on behalf of their employees.

They execute this by taking money from the employees’ earnings prior to issuing a check or direct deposit. That’s the “how” of tax withholding. But the “how much” is a bit more complicated.

The IRS created the Form W-4 for employees to complete to help the employer know how much tax to withhold. The form includes a series of “allowances” that can be made to affect the level of withholding.

In short, the more allowance you make, the less federal tax your employer will withhold from your paycheck. Likewise, the fewer the allowances you make, the more taxes will be withheld.

When to Adjust Your Federal Tax Withholding

Your employer will require you to fill out a W-4 when you are hired. But they won’t typically require you to update the form after that time. It’s up to you.

It is a good idea to revisit your Form W-4 and change your withholding when one of the following takes place:

• You were refunded too much on your tax return.
• You owed too much on your tax return.
• You get married or divorced.
• Your spouse’s employment status changes.
• You have a change in the number of dependents.
• You purchase a home.

As you can see, there are many opportunities for you to revisit your withholding.

How to Adjust Your Federal Tax Withholding

To adjust your withholding, you will need to complete a Form W-4 and give it to your employer. Be sure to ask your employer the number of allowances you are currently making. Then, compare that number to the number of allowances you get when you complete the new Form W-4.

It’s also probably a good idea to visit the IRS withholding calculator to determine exactly how many allowances you should make. Once you know how many allowances you are currently making and how many allowances you should be making, it’s easy to make the requested changes and move on.

Remember, if you want more money withheld for taxes (increasing your refund, all things being equal), you need to decrease the number of allowances you are making. If you want less withheld for taxes (decreasing your refund, all things being equal), simply increase the amount of allowances. TurboTax makes it easy to adjust your W-4 within tax software and gives you top reasons to adjust your W-4 withholding.

Salary, Wages, and W-4s

Have you noticed that your net pay on your paychecks is smaller than your gross pay? Why is it that? As you’ve probably seen, some of that money is allocated for various things such as Social Security, Medicare, retirement, health insurance, and , of course, taxes.

How does your employer know how much to take out?

Based on your answers on the W-4 you filed out when you were first hired, the Human Resources department automatically deducts a certain portion of your pay to cover your tax obligations for the year. In the United States the tax system is pay as you go, so as the year progresses and you earn income, you employer has a portion of your paycheck allocated for taxes.

If you’re self-employed you have to withhold your own taxes and pay your estimated taxes throughout the year yourself.

Reasons You’d Want to Change Your Withholdings

There are several good reasons why you would want to go ahead and change your tax withholding for 2011.

• You want to reduce the big tax refund you received. Some people prefer to get their money throughout the year so they can spend, save, or invest it the way they want to.
• You have a change in filing status. If you got married or divorced, your filing status affects your taxes and you may want to update your W-4.
• You have a child. When you change the number of dependents you have, your tax obligations can change. Make sure you have the proper amount withheld.

If you have any questions as to whether or not you should change your W-4, have a brief appointment with your company’s Human Resource department to get more information. They’ll be happy to help you out.

How to Change Your Withholding

Why is it important to have the correct tax withholdings? You’re expected to pay 90% of your tax obligation as you earn it throughout the year. If you’re not sure what you’re withholding should be, the IRS has an online calculator to help you figure out how to properly fill your W-4.

Changing your W-4 is as simple as going to your HR department and requesting a new form. Follow the guidelines (and use the online calculator if needed) and fill out the form accordingly. When completed, submit it to Human Resources so they can have the your paychecks reflect the new amount.

Thoughts on Tax Withholdings

How many of you have adjusted your tax withholdings? Are you planning on doing so this year? Why or why not?

That means, now’s the time for everyone to get organized. E-file early and you not only avoid the long lines of procrastinators at the post office on April 18th (and the ensuing stress that comes with the territory), but you reap other benefits beyond peace of mind–like these:

Quick Tax Refund

One of the primary advantages to e-filing is that returns are processed in just 24-48 hours. This results in a refund in about 14 days as opposed to up to 6 weeks for a paper return; just 10 days if you don’t itemize tax deductions and use direct deposit.

Direct deposit options

If you’re an e-filer, you can designate up to three financial accounts to deposit your tax refund or use this money to purchase US Series I Savings Bonds. You can even gift the savings bonds to a child or grandchild to help save for college.

Accuracy rate

According to the IRS, 20% of tax returns prepared with paper and pencil have mistakes; the error rate on returns prepared electronically is just 1%. Furthermore, if there is a mistake on your tax return, the IRS can detect it and send back an error report in as little as 48 hours so that you can quickly fix the problem.

Opportunity to adjust your withholding

File early and you’ll likely see that having too much tax withheld from your paycheck. After all, 2 out of 3 taxpayers got a refund last year and the average refund was nearly $3,000. It’s better to adjust your tax withholding and get this money – about $250 a month! – as you earn it than to give the government an interest-free loan.

Reasons to Change Your Tax Withholding Status

• Change in Marital Status – If you get married or get a divorce, you should complete a W-4 as soon as possible to reflect the changes.
• Change in the Number of Dependents – If you have a child or take on a dependent, you should change your W-4. Be sure to take note of the special sections for child tax credit and child care expenses.
• Change in Spouse’s Employment Status - If your spouse’s income situation recently changed, then you should revisit the W-4. Be careful when you go from a one-income household to a two-income house hold: you will likely need to make fewer allowances since you will have more combined income. Look for the worksheet on page 2 of the W-4
• Purchased Your First Home – If you purchased a home recently, it likely means that you will have mortgage interest and property taxes. Both of those items usually allow filers to itemize their deductions. If you itemize deductions you can designate the specifics on the W-4 and get a more accurate withholding rate.
• Too Much Refund Last Year – If last year’s refund was too much for your liking, and you would like more of that money in your paycheck every week, then you should adjust your W-4.
• Too Much Payment Last Year - Likewise, if you paid too much at tax time last year, then you may want to adjust your W-4 and take more money our of your paycheck throughout the year.

What is a W-4?

When you first see the Form W-4, it can be confusing. The IRS uses slightly different terminology that most filers aren’t used to seeing. It’s no wonder so many people need the W-4 Form explained. The Form W-4 is the tax form that your employer uses to help them evaluate how much to withhold from your paycheck. It contains basic personal information, along with a series of questions to help you determine the number of allowances you are making. Allowances aren’t exactly the same as deductions or exemptions. Allowances simply represent any reason to take less money from your paycheck for tax purposes. The more allowances you make, the less your employer will take from your paycheck for taxes.

How to Boost Your Bigger Tax Refund

I encourage you to complete the W-4 as accurately as possible, making allowances for yourself, your spouse, and your dependents, among other things. However, some people choose to decrease the amount of allowance they claim on the W-4 (regardless of their actual situation) in order to increase the amount of money that is withheld from their paycheck. Such a move would increase the amount of tax refund you get at the end of the year. There is also a line on the form (Line 6) to request additional withholdings. Complete that if you want even more taken from your paycheck (a good idea for those with miscellaneous income). This is not a good way to account for side business income though. If you have that you should make estimated payments.

How to Withhold a More Accurate Amount

To get the most accurate tax withholding, resulting in $0 owed or due at tax time, you will simply have to answer the allowance questions accurately. There is an excellent withholding calculator available on the IRS website which will help you precisely determine your allowances and help you complete the W-4 to meet your needs.

Keep in mind that if you itemize your tax deductions, you will need to make some accurate estimates about those using the worksheet on page two of the W-4 Form. Likewise, when your spouse goes from no income to earning income, you will need to visit the worksheet on page two of the W-4 to help you make allowances more accurate.

Finally, remember that when your life situation changes throughout the year (you buy a house, have a child, get married, etc.), you will need to complete a W-4 to reflect your new situation. This will keep your withholding in line with your true tax status. You don’t have to wait till the new year rolls around.

By making these small changes today, you can have a big impact on the year and, should they stick, a lasting impact on your life.

Tweak Your Withholding

If you get a tax refund check each year, you might want to tweak your withholding and stop giving Uncle Sam an interest free loan each year. The average tax refund last year was nearly three thousand dollars – would you like an extra $250 of your own money in your own pocket each month? Of course you would. Use the IRS’s withholding calculator to find out how you can adjust your answers on the W-4.

Exercise More

This is a common New Year’s resolution but it definitely pays to start exercising more and taking better care of your body. People who lose weight and increase their fitness level report having more energy and better moods. It can have a positive financial effect too, as life insurance rates drop for people who are healthier.

Try a New Hobby

A new year means new opportunity, why not make this year the year you try something new? Maybe there’s a hobby you’ve always wanted to try but just couldn’t find the time? When choosing a hobby, be sure to find a way to “test” it out before you throw yourself 100% at it. Some hobbies require a lot of up front cost while others can be introduced little by little. The last thing you want is additional clutter from all the abandoned hobbies you tried!

Get Your Tax Documents Ready

It’s too early to file your tax return but certainly not too early to get your papers ready. Employers aren’t required to mail out W-2 forms until the end of January so you have a few weeks before you should start looking your mailbox for them. Until then, get everything else ready so that you can electronically file your tax return the moment you receive those last few documents. If you have due a tax refund, there’s no reason to wait until April 15th to file.

Opt Out of Marketing Mail

Go to OptOutPrescreen.com and have your name removed from marketing mailings. This will significantly reduce the amount of preapproved credit card offers and other financial junk mail you will receive and help protect your identity. Thieves can’t steal your mail if you reduce the amount of sensitive mail you receive. If you have an existing business relationship with a company, call them and ask to be removed from their internal marketing mailing list. For example, if you have a company’s credit card, they have the right to send you marketing mailings because you already have one of their cards. Opt out today and you won’t have to do it again for five years (or forever if you prefer).

Plan Your Retirement Contributions

All too often we wait until the end of the year to start thinking about tax reduction. One of the best ways to reduce your taxes and set yourself for a more comfortable financial future is by saving for retirement. Unfortunately, planning for retirement is very difficult to do last minute. Where are you going to come up with a few thousand dollars to put into an IRA? That’s why it’s important to plan at the beginning of the year so you can spread your contributions out over twelve months. You can contribute $1,000 towards retirement by putting a mere $84 a month.

Work Less, Enjoy More

Finally, learn to work a little less and enjoy what you have. Did it feel like the entire year flew by too quickly? When you look back, are your memories filled with fun times with friends and family or filled with days stuck at the office or on the job? If you’re one of the lucky few who have a balanced mixture of both, good for you. If you don’t, learn to add a little balance. You’re working hard for a reason, to support yourself and your family, learn to enjoy the fruits of your labor before it’s too late.

Check Your Retirement Plan Contributions

One of the first places to turn to is your retirement plan. If you’re like the millions of other Americans who put money away for retirement in a 401(k) or Traditional IRA, you have a lot of control over your taxable income. Since these are pre-tax accounts the money you contribute each year directly lowers your taxable income.

Many companies are beginning to bring back raises and bonuses late this year as the economy slowly begins to improve. This means more money for you, but it is also a perfect opportunity to jumpstart your retirement plan and take an extra bite out of this year’s taxes. Instead of pocketing any extra income you might want to consider increasing your retirement plan contributions. This is a win-win because not only do you help your portfolio grow even faster, but you’re cutting back on taxable income.

The easiest way to do this is to base your contribution rate on a percentage. Whether you contribute to a 401(k) with each paycheck or make monthly deposits into an IRA, by basing your contribution on a percentage of income instead of a flat dollar amount you’ll be sure to automatically save more if you make more.  This way you don’t even have to think about it. If you’re contributing 10% of your paycheck and you finally get a 3% raise, you’ll automatically put 10% of that 3% into your retirement plan as well. Unless you’re already extremely wealthy, you can never save too much for retirement.

Check Your Tax Withholding

Once your retirement plan contributions are in line you should probably take a look at your income tax withholding. This is another area people often overlook yet it’s an incredibly easy way to put more money in your pocket with every paycheck. By optimizing your withholding you can make sure you’re having enough withheld so that you don’t owe the IRS any money at the end of the year while making sure you aren’t withholding so much the government is getting an interest-free loan and holding your money hostage for most of the year.

For most people, tax withholding can be set by simply filing a Form W-4 with your employer. Perhaps you remember filling one of these out when you first started your job. Well, you can fill a new one out at any time, and if you’ve had changes in your life such as getting married, having a child, or anything like that, it’s a good reason to go over your withholding again.

The instructions on the form will walk you through how to estimate your exemptions, but the bottom line is the closer your exemptions are to zero, the more tax is withheld. That’s good if you want a big refund in the spring, but you can do a lot better with your money if you take control of it. If you can carefully calculate your exemptions so that enough, but less tax is withheld, you will be getting more money with each paycheck. From there, you can use that money now to pay down high-interest debt, add it to your retirement account, or simply tuck it away in savings and earn a little interest. Sure, you can do this with a single refund each year as well, but oftentimes that money doesn’t always get used as intended when it comes in as one lump sum like that.

So, while taxes may be the last thing on your mind this summer, it isn’t too early to start planning ahead. By maximizing your retirement fund contributions and streamlining your tax withholding you can be ahead of the game come April.

Jeremy is a chartered retirement planning counselor and writes about personal finance at Generation X Finance and About.com.