How Should You Calculate Your Tax Withholding?

September 01, 2016

Do you end up owing too much to the IRS during tax season or get back a big refund? The former can be a nasty surprise and even lead to penalties if you owe too much while the latter means that you made a large interest-free loan to Uncle Sam. In any case, if you’re unhappy with the result or had a significant life event like a like a change in your job or family situation, you may want to adjust your tax withholding. I usually owe a little bit but this year, I got a sizeable refund because of expenses my rental properties. Here are my experiences with some of the ways to calculate the right number of allowances to claim:

Form W-4 Personal Allowances Worksheet: This is probably what most people use since it comes with the form you give to your employer to determine withholding. It’s pretty simple to fill out if you don’t itemize, but if you do, it will require you to have your tax return and do some calculations. According to the worksheet, I should continue to take 2 allowances (assuming my math was correct for the itemized part).

The IRS Withholding Calculator: Since this is an official IRS calculator, it’s often the next stop for those who want a more sophisticated calculation or don’t want to do their own math. The downside is that it feels like an official IRS calculator. It actually took me longer to complete and in addition to my tax return, I also needed to lookup info from my last paycheck. It suggested that I increase my allowances to 3 to reduce my refund to about $75.

TurboTax Withholding Calculator: I use TurboTax to prepare and file my taxes, but I was disappointed in their withholding calculator. I actually found it to be as time consuming to fill out as the IRS one but it left some info out. As a result, it ended up telling me to stick with the original 2 allowances.

Kiplinger’s Easy-to-Use Tax Withholding Calculator: This calculator lived up to its name. I still needed my tax return, but it only asked 3 questions and directed me where to look for the answers on my return. However, its suggestion of increasing my allowances by 3 to increase my monthly take-home pay by about $280 was the most radical. Given the simplicity of the required inputs and the outlying result, I’m a bit skeptical of the accuracy of this one, at least for more complex tax situations.

My personal verdict is to simply use the form W-4 worksheet. I had to do a little math but it was still one of the least time-consuming. The IRS calculator probably gave me the most accurate estimate, but I personally don’t mind having a little extra withheld, especially since my rental property deductions may not be as high this year. It’s not like I’d be earning much interest these days on that extra money anyway.

However, if you’d like to make your withholding more precise, you may want to use one of the online calculators. I’d suggest the IRS one for accuracy and the Kiplinger’s one if your tax return is really simple. Leave TurboTax to the actual return.