You should try to have your withholding match your actual tax liability. If not enough tax is withheld, you will owe tax at the end of the year and may have to pay interest and a penalty. If too much tax is withheld, you will lose the use of that money until you get your refund.

Always check your withholding if there are personal or financial changes in your life or changes in the law that might change your tax liability. See Figure 1 for examples.

The earlier in the year you check your withholding, the easier it is to get the right amount of tax withheld.

You should check your withholding when any of the following situations occur.

You can use the worksheets and tables in this publication to see if you are having the right amount of tax withheld.

Follow these steps.

If you are not having enough tax withheld, line 6 of Worksheet 9 will show you how much more to have withheld each payday.

If you are having more tax withheld than necessary, line 5 of Worksheet 9 refers you to How Do I Decrease My Withholding.

If not enough tax will be withheld, you should give your employer a new Form W-4 showing either a reduced number of withholding allowances or an additional amount to be withheld from your pay. See How Do I Increase My Withholding, on page 5.

There is a good chance you are not having enough tax withheld if:

If your employer cannot withhold enough additional tax from your pay, you may need to make estimated tax payments. This might be the case if your pay is low and you have substantial nonwage income, such as interest, dividends, capital gains, or earnings from self-employment. For more information on estimated tax payments, see chapter 2 of Publication 505.

If too much tax is withheld, you may receive a large refund when you file your return. If you would prefer to receive the money during the year, you should see if you qualify to have less tax withheld. If so, give your employer a new Form W-4 showing more withholding allowances.

There is a good chance you are having too much tax withheld if:

There are two ways to increase your withholding. You can:

If your completed Worksheets 1 and 9 show that you may have more tax withheld than your projected tax liability for 2008, you may be able to decrease your withholding. There are two ways to do this. You can:

Converting Credits to Withholding Allowances

Figure 2, on page 6, shows many of the tax credits you may be able to use to reduce your withholding. The Form W-4 Personal Allowances Worksheet provides only rough adjustments for the child and dependent care credit (line F) and the child tax credit (line G). Complete Worksheet 8 (see page 18) to figure these credits more accurately and also take other credits into account.

Include the amount from line 12 of Worksheet 8 in the total on line 5 of the Deductions and Adjustments Worksheet. Then complete the Deductions and Adjustments Worksheet and the rest of Form W-4.

If you take the child and dependent care credit into account on Worksheet 8, enter -0- on line F of the Personal Allowances Worksheet. If you take the child tax credit into account on Worksheet 8, enter -0- on line G of the Personal Allowances Worksheet.

Figure 2. Tax Credits

For more information about the ...	See ...
Adoption credit	Form 8839 instructions
Alternative fuel vehicle refueling property credit	Form 8911 instructions
Alternative motor vehicle credit	Form 8910 instructions
Child and dependent care expenses, credit for	Publication 503, Child and Dependent Care Expenses
Child tax credit (including additional child tax credit)	Instructions for Form 1040 or Form 1040A
Clean renewable energy bond credit	Form 8912 instructions
District of Columbia first-time homebuyer credit carryforward from 2007	Form 8859 instructions
Earned income credit (unless you requested advance payment of the credit)	Publication 596, Earned Income Credit
Education credits	Publication 970, Tax Benefits for Education
Elderly or the disabled, credit for the	Publication 524, Credit for the Elderly or the Disabled
Foreign tax credit (except any credit that applies to wages not subject to U.S. income tax withholding because they are subject to income tax withholding by a foreign country)	Publication 514, Foreign Tax Credit for Individuals
General business credit	Form 3800, General Business Credit
Gulf tax credit bond credit	Form 8912 instructions
Health coverage tax credit	Publication 502, Medical and Dental Expenses
Mortgage interest credit	Publication 530, Tax Information for First-Time Homeowners
Prior year minimum tax, credit for (if you paid alternative minimum tax in an earlier year)	Form 8801 instructions
Qualified zone academy bond credit	Form 8860 instructions
Residential energy efficient property credit	Form 5695 instructions
Retirement savings contributions credit	Publication 590, Individual Retirement Arrangements (IRAs)

Example.

Brett and Alyssa Davis are married and expect to file a joint return for 2008. Their estimated income from all sources is $68,000. They also expect to have $15,900 of itemized deductions. Their projected tax credits include a child and dependent care credit of $960 and a mortgage interest credit of $1,700.

The Davis' complete Worksheet 8, as follows, to see whether they can convert their tax credits into additional withholding allowances.

1. Line 1, expected child and dependent care credit—$960.

2. Line 9, expected mortgage interest credit—$1,700.

3. Line 10, total estimated tax credits—$2,660.

4. Line 11—6.7. Their combined taxable income from all sources, $68,000, falls between $37,001 and $85,000 on the table for married filing jointly or qualifying widow(er). The number to the right of this range is 6.7.

5. Line 12, multiply line 10 by line 11—$17,822.

Then the Davis' complete the Form W-4 worksheets.

1. Because they chose to account for their child and dependent care credit this way, they enter -0- on line F of the Personal Allowances Worksheet and figure a new total for line H.

2. They take the result on line 12 of Worksheet 8, add it to their other adjustments on line 5 of the Form W-4 Deductions and Adjustments Worksheet, and complete the Form W-4 worksheets.

If the change is for the current year, your employer must put your new Form W-4 into effect no later than the start of the first payroll period ending on or after the 30th day after the day on which you give your employer your revised Form W-4.

If the change is for next year, your new Form W-4 will not take effect until next year.

Generally, the amount your employer withholds for federal income tax must be based on your Form W-4. However, whether you are entitled to claim exempt status or a certain number of withholding allowances is subject to review by the IRS. If the IRS determines that you cannot claim more than a specified number of withholding allowances or claim a complete exemption from withholding, the IRS will issue a notice of the maximum number of withholding allowances permitted (commonly referred to as a “lock-in letter”) to both you and your employer.

If you receive a lock-in letter, the IRS has instructed your employer to begin withholding income tax from your wages based on the withholding rate and allowances shown in the letter. In addition, your employer has been instructed not to honor your current Form W-4 or a new Form W-4 unless it results in more withholding than the lock-in letter allows.

The IRS will provide a period of time during which you can dispute the determination before your employer adjusts your withholding. Follow the instructions in your letter if you wish to submit a new Form W-4 or contact the Withholding Compliance Unit with questions. Additional information is available on the IRS website at www.irs.gov. Enter the keyword “withholding compliance questions” in the search box.

When you first began receiving your pension, you told the payor how much tax to withhold, if any, by completing Form W-4P, Withholding Certificate for Pension or Annuity Payments (or something similar). However, if your retirement pay is from the military or certain deferred compensation plans, you completed Form W-4 instead of Form W-4P. You completed either form based on your projected income at that time. Now that you are returning to the workforce, your new Form W-4 (given to your employer) and your Form W-4 or W-4P (on file with your pension plan) must work together to determine the correct amount of withholding for your new amount of income.

The worksheets that come with Forms W-4 and W-4P are basically the same, so you can use either set of worksheets to figure out how many withholding allowances you are entitled to claim. Start off with the Personal Allowances Worksheet. Then, if you will be itemizing your deductions, claiming adjustments to income, or claiming tax credits when you file your tax return, complete the Deductions and Adjustments Worksheet.

The third worksheet is the most important for this situation. Form W-4 calls it the Two-Earners/Multiple Jobs Worksheet, Form W-4P calls it the Multiple Pensions/More-Than-One-Income Worksheet—both are the same. As you have learned in this publication, if you have more than one source of income you may need to claim fewer withholding allowances, or request your employer withhold an additional amount from each paycheck, to have enough withholding to cover the tax on your higher income.

Once you have figured out how many allowances you are entitled to claim, look at the income from both your pension and your new job, and how often you receive payments. It is your decision how to divide up your withholding allowances between these sources of income. For example, you may want to “take home” most of your weekly paycheck to use as spending money and use your pension to “pay the bills.” In that case, change your Form W-4P to zero allowances and claim all that you are entitled to on your Form W-4.

There are a couple of ways you can get a better idea of how much tax will be withheld when claiming a certain number of allowances.

And remember, this is not a final decision. If you do not get the correct amount of withholding with the first Forms W-4 and W-4P you submit, you should refigure your allowances (or divide them differently) using the information and worksheets in this publication, or the resources mentioned above.

You should go through this same process each time your life situation changes, whether it be for personal or financial reasons. You may need more tax withheld, or you may need less.