Each year, the IRS issues withholding tables that dictate how much tax employers should hold back from employees’ wages. The more allowances you claim you on your W-4, the less tax you have withheld, and the more money you get in your paychecks up front. You can claim one allowance for yourself, plus an additional allowance for your spouse and each dependent you list on your tax return.
Some workers, however, claim fewer allowances on their W-4 than they’re entitled to, whether due to fear of owing money to the IRS or due to a lack of knowledge about how those allowances work. But if you’re having a hard time financially right now, and you typically get a refund from the IRS when you file your taxes, then it pays to look at your current withholding and see if any adjustments are necessary. Claiming an extra allowance you’re entitled to could put more money back in your pocket when you need it the most.
Of course, that may beg the question: What if make that change, and as a result, your employer withholds too little tax? In that scenario, you’re looking at potentially owing the IRS money when you file this year’s taxes in 2021. But if that’s a concern, what you can do is adjust your withholding, figure out exactly how much extra money that adds to each paycheck, and then put that additional cash into a dedicated savings account that you only touch if there’s an immediate expense you need to pay for. That way, the money you don’t use right away can earn interest for you (as opposed to you withholding more tax than needed and giving the government an interest-free loan), and if you wind up owing the IRS next year, you can dip into that account to cover your tax bill.