Withholding taxes

Question: Is it better to owe the federal/state government tax, or receive a refund? How much money should one aim to owe/receive when deciding how many exemptions to take on a W-4 form? In anticipation of buying a house last year, my husband and I took more exemptions, and now owe quite a bit more than we have in previous years. We found our home late in 2008, and closed at the end of January. Now we are trying to plan for 2009 taxes. Thank you for your help, Jeannine, San Diego, CA

Answer: Congratulations on getting a jump on your tax filings for next year. Many people haven't even filled out this year's return. (And you know who you are.)

Ideally, you won't owe anything and you won't get anything back either. It's always nice to get a refund rather taking out the check book in April. Still, if the refund you are used to is over a few hundred dollars I would adjust your withholding. The reason is that the government doesn't pay you any interest while holding on to your money. In essence, you're making an interest free loan to Uncle Sam. On the other hand you can also make an adjustment if you will owe more than you're comfortable with come April. Remember, your withholding has been reduced slightly because of the Making Work Pay Credit that was part of the Obama Administration's fiscal stimulus package.

The IRS has a withholding calculator here.

It reflects the new withholding tables. The IRS recommends that any employee use the calculator if they work two jobs, are a two-income couple (that's you), and if you can be claimed as a dependent to make sure that the amount being withheld is what you want--and so that you don't owe more than you expect next year.

About the author

Chris Farrell is the economics editor of Marketplace Money.

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