Adjusting your withholding is something that should be done from time to time, especially under certain circumstances. Many people find they fill out a W-4 when they first start a job, but never again revisit the amount of exemptions. This could cost you a lot of money. If you have too much taken out of your paycheck, you generally receive a refund come tax time. However, you are essentially giving Uncle Sam an interest-free loan. Think about it this way–you would be better off taking that money and investing it than simply handing it over to the IRS to await tax season. On the other side of the same coin is not having enough taken out of your paychecks. In this case, you may end up with an unexpected bill come tax time, or potentially even face a tax penalty.
Adjusting Withholding for Income Increases
Sounds like a no-brainer, right? You’d be surprised how many people fail to realize that a raise, a second job, a spouse getting a job, or any activities that increase your income will also have an impact on your tax liability. Generally speaking, when your income goes up, you move into another tax bracket. So adjusting your withholding to reflect more earnings can be extremely beneficial. It may also help you avoid paying tax penalties at the end of the year as the result of not withholding enough.
Change Withholding For Unemployment
Being unemployed is difficult enough for some people. It can be even more difficult if you fail to account for the lost income if you become employed again. Your total income for the year will be less. Make allowances on your W-4 to reflect that lost income.
Changes in Marital Status
Did you get married this year? Change your withholding. Get divorced? Change your withholding. Changes in marital status will change the amount of income per household. If you are married filing jointly, your tax bracket represents two people instead of just one. This changes your tax liability for your household. You also qualify for other deductions. Failing to make these adjustments on your W-4’s means you’re withholding is probably inaccurate.
Congratulations! It’s a Tax Deduction!
Having or adopting a child can cost an arm and a leg over time. But it also means…you guessed it…TAX BREAKS! More than just a bundle of joy, another human in the household means adjusting your allowances. You may also qualify for the Child Tax Credit, Child Care Tax Credit, and other credits.
Adjusting your withholding to better reflect your actual tax liability is a smart move. Ideally, your tax refund or bill should be as close to zero as possible. For help adjusting your withholding speak to your tax professional. More of a DIY person? Well, you can do that, too. The IRS withholding calculator can help you identify places where you should make adjustments. As always, our clients are important to us. If you are absolutely uncertain give us a call and we can take a quick look to make sure you’re on the right track!