Don't feel good if you've completed your taxes for the year and you are going to receive a substantial refund. Your tax refund is not a gift from the government. It is your own money being sent back to you. The Treasury Department does not pay interest on the money you're refunded on your taxes, so all you did was give the government an interest-free loan.
Ideally, your withholding should equal the exact amount of your tax liability, so you neither owe the IRS money nor get a refund when you do your taxes for the year. At most, you want to get a very small tax refund. However, if you pay too little, you'll have to pay interest and penalties.
If you're an employee, the amount of income tax withheld from your paychecks by your employer depends on how you filled out IRS Form W-4, Employee's Withholding Allowance Certificate. You complete this form when you start a new job and give it to your employer. It does not go to the IRS. Your employer (or its payroll service) uses the information you provided on the Form W-4 to determine how much to withhold.
You use Form W-4 to claim withholding allowances. The number of allowances you claim determines the amount of your withholding. There are allowances for yourself, your spouse, your dependents, and for itemized deductions and credits such as the child tax credit.
To change your withholding, complete a new Form W-4, Employee's Withholding Allowance Certificate, and submit it to your employer. You can do this at any time.
Form W-4 includes a worksheet you can use to determine your withholding, based on the number of jobs you hold, marital status, and dependents. However, you'll find it much easier to determine your withholding electronically. The IRS has an easy-to-use withholding calculator on its website.
It's particularly important to redo your Form W-4 if there is a major change in your tax situation that will affect the amount of tax you'll owe for the year. Examples of these types of changes include:
Thus, for example, if you're going to have a new baby this tax year, you should redo your Form W-4 by adding an additional allowance for dependents. This will decrease the amount withheld from your pay.
If the changes reduce the number of allowances you are allowed to claim or changes your marital status from married to single, you must give your employer a new Form W-4 within ten days.