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To Have or Have not, which is it? A tale of a Tax Refund

To Have or Have not, which is it? A tale of a Tax Refund Now that the fourth year medical students have received their residency contracts and all sight lines are focused on the next phase of training, it important to be aware of the importance of the tax related chore: completing your W-4. Your W-4 determines how much money your employer (your residency program) withholds from your paycheck to pay taxes, based on the number of allowances you claim. New residents fill out this from during their Residency Orientation and then move on to more urgent matters, such as finding their way through the hospital to the nearest bathroom.

Initially, most employees will choose one allowance on the W-4 that reflects their personal situation. But if your personal situation has changes (marriage, new arrival, etc…) after you started your residency, the number of allowances you chose when you filled out the W-4 initially may no longer be appropriate. You may need to consider changing your W-4 withholdings to align more with your new situation. Consulting with a financial advisor or tax professional is advised.

So, when do you consider a change? If you paid a big tax bill, this would be one red flag. The U.S. tax system operates on a “pay as you go” basis, which means you are supposed to pay taxes on your income throughout the year. If you don’t have enough tax withheld, you could face underpayment penalties, even if you caught up with the IRS during Tax season.

Another red flag is if you received a big refund. Financial advisors will be the first to claim that having a big refund is the client’s loss in being able to invest that money instead of giving an interest-free loan to the federal government. Rock-bottom interest rates make that argument less compelling, but this is another reason to have a discussion with your financial advisor and see what options you do have. Obviously, a certificate of deposit is not going to pay you the best return, at least not in this current financial environment. Still, giving the federal government a no-interest loan is a bad idea if you’re carrying a credit card balance with a high interest rate or you are living on the edge financially.

Another issue with over-withholding is that you ultimately have to wait to get your refund during tax season. Residents with more complicated tax situations will likely have to wait longer for the federal government to process a return. For example, this year the federal government narrowly averted a government shutdown that threatened to delay refunds. Something to think about.

Residents are prone to changes in their income with the prospects of moonlighting, which doesn’t withhold taxes from your earnings, or a spouse who becomes a second wage earner. You can avoid underpayment penalties by paying estimated taxes every quarter on that additional moonlighting income, but it is much easier to increase your withholdings. This is an excellent opportunity to discuss your situation with a financial advisor or tax person. To increase the amount of taxes withheld from your paycheck, you need to decrease the number of allowances you claim. If this is no longer possible, you can specify a dollar amount to have withheld. For example, if you want your program or employer to withhold an additional $100 a month in taxes from your paycheck, write that number on line 6 of your W-4.

Ultimately, you will likely need to adjust how many allowances to provide on the W-4. You can guess or you can add or subtract an allowance, depending on whether you want to raise or lower your withholding, and hope for the best. This is not an ideal way to do it. You can with the help of technology, or a friendly tax preparer, you can be more precise. TurboTax and H&R Block tax software includes a program that allows customers to prepare forms to adjust their withholding, based on information from their 2010 tax return. If you paid a tax preparer to do your taxes, that individual can help you change your withholding, usually at no extra cost. The IRS also offers a withholding calculator at To use the program, you’ll need your most recent pay stub and your 2010 income tax return.

Lastly, you could always select 1 in the first year of employment and see where you are during the next tax season. Make it simple…

The views expressed in this content represent the perspective and opinions of the author and may or may not represent the position of Indiana University School of Medicine.
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Jose Espada

Jose Rivera Espada is the director of financial aid at IU School of Medicine, a nine-campus allopathic medical school in Indiana. Jose’s experience includes working as an assistant director of financial aid at Butler University and a financial aid coun...