How to Reduce Taxes Withheld From Paycheck

Form W-4 determines how much tax you pay through your paychecks every pay period. If you’ve already paid enough taxes and satisfied your estimated tax liability for the tax year, there isn’t really a point in letting your employer continue withholding tax at the same rate.

That’s, of course, unless you plan on getting a fatter refund. It is highly recommended that you claim exempt status if you’re hundred percent sure that you’ve paid enough through federal income tax withholding. Doing this will allow you to increase your cash flow for the remainder of the year where you can use it to invest for better returns. After all, paying more tax than you need doesn’t bring you any interest. In a way, you lose money due to inflation. That’s why it’s best to stop paying taxes when you don’t need to pay anymore.

Stopping taxes withheld by claiming exempt status

The exempt status from federal income tax withholding means your employer won’t collect them anymore from your paychecks. You should only claim the exempt status if you’ve already paid taxes in full. Learn how to claim exempt status from federal income tax withholding on Form W-4.

Reducing tax withholding rate

Just as you can claim exempt status to stop taxes withheld from your paychecks, you can reduce the rate as well. This is better for taxpayers that still have taxes to pay but not as much. Additionally, you can also continue withholding taxes at the same rate and claim exempt status once you satisfy your tax bill.

Either way, the goal is not to overpay taxes significantly so that you can increase cash flow and invest that money if you don’t need it. Here are ways you can reduce taxes withheld using Form W-4.

Do these on Form W-4 to reduce taxes withheld:

  • Claim dependents: The number of dependents you claim on Form W-4 largely determines how much tax is withheld from your paychecks. The more dependents you have, the less tax will be withheld and vice versa.
  • Zero out the extra withholding on Line 4(c): Taxpayers that entered an extra withholding amount on Form W-4 can file the same one as before but with a blank space on Line 4(c). Since the extra withholding amount is for effective every pay period, you shouldn’t withhold as much tax.
  • Use the tax withholding estimator: You can also use the tax withholding estimator to see how much tax you’ll owe and compare with your payments. Depending on the outcome, you might realize that you don’t even need to reduce or stop taxes withheld from your paychecks. Read this to find out how the withholding estimator works.

Once the tax year ends, you’ll need to file a new Form W-4 once again, but the form should include the most accurate information so the tax withholding rate is just right. Not doing so will result in underpayment penalties since the likelihood of paying less than 90 percent of your tax liability is a lot higher.

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