Is it time to check your withholding?

Did you receive a big refund on your 2002 taxes?  Or worse still, did you wind up with an unexpected tax bill?  In either case it might be time to adjust your withholding.

Many people like to receive a refund from the IRS — they look upon it as a form of forced saving.  If you're of this opinion, that's fine.  But too big a refund means you're wasting your money, giving an interest-free loan to the government.

On the other hand, if you underpaid your taxes by more than $1,000 and don't meet certain other exceptions, you could be hit with a penalty.  All sorts of things can cause underpayment of taxes.  You might receive interest, dividend, or tip income on which no taxes are withheld.  If you've been unemployed, your unemployment benefits could increase your tax bill.  And, of course, if you're self-employed, it's your responsibility to make estimated tax payments.  These should cover both income taxes and FICA taxes (social security and Medicare).

There are two ways to adjust the taxes you pay.  If you're an employee, you can file a new Form W-4 with your employer.  To increase withholding, you can either reduce the number of exemptions you claim on the W-4, or you can specify an extra dollar amount to be withheld from every paycheck.  Alternatively, you can make estimated tax payments to cover the taxes you owe in each quarter.

However you do it, you should adjust your withholding to match the taxes you expect to owe.