With tax season behind us, it’s safe to say our minds are on summery pleasures like vacations, Twins games, and lakes. But now is also a good time to think back to your 2016 tax return: Were you surprised at the size of your refund, or by how much you owed? If so, it’s time for a W-2 checkup.
Taking a look at your W-2 can help you understand why this has happened and prevent surprises in 2017. Here are two reasons why this checkup is so important:
You may need to adjust your federal and/or state withholdings.
If you’re getting a huge refund, it’s possible your withholdings are too high. On the other hand, if you’re stuck with a large tax bill, they could be too low. Adjusting your withholdings involves changing the number of exemptions claimed on your W-4. You should be able to modify your W-4 at any time, but check with your employer’s HR department to make sure there are no company restrictions on timing or frequency.
You could be putting more into your deferred compensation retirement plan.
Contributing pre-tax earnings to your compensation retirement plans, such as a 401K, can help you lower your taxable income. So if you’re getting big refunds, you may want to consider reducing your W-4 exemptions so less is withheld from your paycheck. Then, put the difference into your 401K or other pre-tax benefits your employer may offer through a flexible benefits plan.
Make the most of your W-2.
There are so many things that might affect the number of exemptions you claim, including the number of kids you have and your spouse’s employment. Your W-2 should accurately reflect your current situation—not as it was when you first filled out your W-4. And while paying in too much can be an effective savings account, do you really want the government to have an interest-free loan? Your CPA can help you review your 2016 W-2 and offer recommendations for making the most of your situation. With a thorough W-2 checkup, your 2017 tax season is sure to be more pleasant.