When’s The Best Time To Modify Your W-4 Withholdings?
As we all know, paying taxes in some form or another is a certainty. But the amount of taxes that you have withheld from your paycheck isn’t necessarily set in stone: You can change your tax deductions as circumstances in your life change or as necessity warrants.
In the United States, most individuals take the pay-as-you-earn (PAYE) approach to taxation, in which income tax is estimated, paid throughout the year, and then accounted for when taxes are due the following year. Employers are required by the federal government to withhold part of their employees’ income for taxes by deducting a portion of funds from their paychecks as indicated by information that’s been provided on a Form W-4.
In general, the amount of taxes withheld is determined by several factors:
- The amount of earned income from a single or multiple jobs
- Whether you file “married” or “single”
- The number of allowances for which you qualify
- If you prefer to withhold extra funds
To help you accurately calculate your withholding, the Internal Revenue Service (IRS) offers a withholding calculator on its website. In addition, information and instructions are provided on Form W-4.
Events That Trigger Withholding Changes
Employers rely on the information that employees provide on their Form W-4 in order to calculate withholding amounts. But in the course of a year–or sometimes even just months–life circumstances may change, which could be a good time to review the amount of your tax withholding status.
Significant changes in your life or your household can impact your tax situation. When major life events such as the following occur, you may want to consider changing the amount of withholding in order to avoid owing more taxes than necessary come the end of the year.
You’re Getting Married, Divorced, Or Buying A New Home
If you’re married and filing a joint tax return, your taxes could be impacted in two ways: If your spouse earns an income, your household withholding may increase, or if your spouse doesn’t earn an income, your overall withholding will most likely decline.
Divorce, and the subsequent division of income, can alter your overall household income and impact your withholding. Alimony is another consideration in and of itself. In 2019, alimony started to be recognized differently in accordance with the 2017 Tax Cuts And Jobs Act. The Act stipulates that alimony payments are no longer tax-deductible for the payer and that recipients don’t have to declare alimony as income.
You can update your withholding in anticipation of the tax benefits that come with home ownership. First-time homebuyers can take advantage of several tax credits, which the IRS regularly changes. Other expenses may also be eligible for tax deductions or credits, including dependent care expenses, education costs, medical expenses, and charitable contributions.
You’re Welcoming A Child Or Earning More Money
The birth or adoption of a child adds a dependent to your household and therefore lessens the overall tax burden, which is designed to compensate for the ongoing costs of raising and caring for a child. To capitalize on the credits and deductions available for having children, you’ll want to consider reducing your withholding.
Consider taking a second look at your withholding if you find yourself the recipient of non-wage income from stock dividends, interest income, or side businesses. For example, if you received income from cryptocurrency or sold equities for profit, any such proceeds could be subject to short- or long-term capital gains.
Individuals who work multiple jobs or who contribute to a two-income household can experience withholding disparities, which is more likely to happen if each withholding certificate is completed to withhold an amount specific to each employment situation. For example, working two separate jobs that each offer a $25,000 salary would land a taxpayer in the 22% tax bracket (in 2021). Individually, however, each employment withholding certificate could put the taxpayer in the 12% tax bracket.