With the Internal Revenue Service tax filing deadline rapidly approaching, it’s a good time to start thinking about your paycheck withholding amounts.
The majority of Americans pay their annual tax bills using payroll withholding. In doing so, a percentage of your salary is taken out each pay period and sent to the IRS where it is credited toward your final tax bill.
It’s a smart idea to take some time every year to ensure you are withholding the correct amount. Your income or deductions change, and as a result, you may want to adjust your withholding.
If you aren’t taking enough out, you’ll have to write a check to Uncle Sam when you file your return next year. On the other hand, if you are withholding too much, you’ll get a large refund, which is not necessarily good either. That’s because you’ve essentially given the government free use of your money instead of making better use of it yourself through the year.
Most financial advisors agree that the best scenario is to try and match your withholding as closely as possible to your actual tax liability.
How to adjust your withholding
To adjust your withholding amounts, all you have to do is file a revised W-4 form with your employer. The more allowances you claim, the less money will be withheld for your taxes. On the flip side, the fewer allowances you claim, the more tax will be withheld. You can also request your employer withhold a flat amount from your paycheck.
The W-4 form includes three types of information that your employer will use to figure your withholding.
- Whether to withhold at the single rate or at the lower married rate.
- How many withholding allowances you claim. (Each allowance reduces the amount withheld.)
- Whether you want an additional amount withheld.
Reasons to adjust withholding
Other than the reasons listed above, there are a number of other events that should result in withholding adjustments. While some life events result in more taxes, others entitle you to credits and deductions that lower your taxes.
- You or your spouse start a second job – when your income goes up, the amount you owe in taxes will consequently also increase.
- You were unemployed for part of the year – if you remained unemployed for the rest of the year, you likely had too much withheld. On the other hand, if you were able to find a new job, you would have to adjust your withholding based on your new income.
- You got married – married couples who file jointly have a lower tax rate.
- You got divorced – if you become single again, the tax benefits you gained when you got married will be reversed.
- You have a baby – having a baby will allow you to claim an additional allowance for a dependent.
You can adjust your W-4 at any time during the year. Just remember, adjustments made later in the year will have less impact on your taxes for that year.