Finance Globe

U.S. financial and economic topics from several finance writers.
3 minutes reading time (614 words)

Does Your Tax Withholding Need an Adjustment?

Whether you get a tax refund or you owe taxes after completing your tax return depends largely on how much you paid in taxes throughout the year. If you receive a refund, then you overpaid. On the other hand, owing taxes indicates that you underpaid taxes throughout the year.

You probably know, from your paystub, that you have a certain amount of money deducted from your pay for Federal and state taxes. Your employer’s payroll department determines how much you’ll owe in taxes that year based on your salary and withholding information and then divides that amount evenly among all your paychecks. Your employer will pay the IRS on your behalf and at the beginning of the next year, you file a tax return to be sure you paid the correct amount.

The Form That Determines Your Withholding


When you first got hired, one of the documents you had to fill out was an IRS W-4 form. The form helps your employer figure out how much to withhold from your pay. On the form, you enter the number of personal allowances based on your filing status, number of dependents, and whether you’ll claim certain child care or child tax credit deductions.

When Your Withholding Should Be Adjusted

There are some situations where you’ll likely need to change your tax withholding.
  • You get married or divorced, especially if your filing status will change. For example, when you get married, you may choose married filing jointly status which would affect the amount of tax you owe. Or, if you get divorced, your filing status may change to single or head of household. If you’re going to pay or receive alimony, changing your withholdings can ensure you’re having the right amount deducted from your pay.
  • Your number of dependents changes, e.g. you have or adopt a child or a child grows up and starts making enough income to support him or herself.
  • Your child leaves daycare and goes to kindergarten, i.e. you’ll have less than $1,900 of child or dependent care expenses.
  • You no longer are eligible for the child tax credit. This happens when your income increases above the allowed amount, more than $85,000 if you’re single or $119,000 if you’re married.
  • You get a side job that pays a lot, specifically one that doesn’t pay wages or that doesn’t withhold taxes from your wages. You’ll need to either adjust your withholding (so that you have more withheld from your paycheck) or start paying estimated taxes to avoid having a tax bill next year.
  • It’s important that your employer has a W-4 on file for you. Otherwise, they’re required to withhold taxes based on the highest tax rate.

You could also consider adjusting your withholdings if you owed money to the IRS or received a big refund. When you owe money, it’s often because you didn’t have enough withheld from your paycheck. You can generally claim fewer allowances to have more money withheld from your pay. Claiming 1 or 0 will result in more money being withheld from your pay.

On the other hand, if you received a big refund, you had too much withheld from your check. Many people like the idea of getting a big tax refund check, however, you could have received that money in your check all year long. You could have used it to fund your retirement, pay off debt (and avoid interest), or put it in savings or CD and earned interest on it.

The IRS has a withholding calculator on its website to help you figure out what your withholding should be. If you have questions, a tax professional can also guide you in the right direction.

Source: IRS.gov
Introduction to CDs: Certificates of Deposit
Facing Your Biggest Financial Feasr
 

Comments

No comments made yet. Be the first to submit a comment
Guest
Monday, 14 October 2019

Captcha Image