6 Top Reasons To Adjust Your Tax Withholdings
With each payment you receive from your employer, a pre-determined amount to go towards your estimated tax payments for the year is deducted; this is your tax withholding. It can be difficult to get the amount of tax withholding correct; most people either withhold too much or too little on their W-4, which causes them to either owe more money or expect a refund from the IRS when they file taxes.
While some people end up having to pay more in taxes due to under-withholding, many people look forward to getting a refund once they’ve filed the year’s taxes; however, many tax experts state neither is the ideal situation. Essentially, when you get a refund from the IRS it’s because you overpaid your taxes throughout the year; this is like giving no-interest loan to the IRS that they repay to you at the end of the year. Instead, you could have retained that money and invested it or used it during the tax year.
If you are looking to avoid either situation mentioned above, it’s important to change your withholding amounts from time-to-time. Certain life events can affect the amount of taxes you owe, so let’s take at when to change your tax withholdings in order to avoid under or overpaying your estimated yearly taxes.
Your Marital Status Changes
Your marital status has a large impact on your tax rate and any deductions you may qualify for; this is why it is essential that if you get married or divorced at any point during your working career, you update your W-4 withholdings to reflect a potential increase or decrease expected in the taxes you owe. Not updating your W-4 could mean you withhold too little and have to pay at the end of the tax year.
You or Your Spouse Gets a Second Job
When you or your spouse pick up side work it means extra income, which is great, but it also means that your tax bracket can change and the amount of taxes you owe will probably increase. It’s best to check and adjust your W-4 withholding accordingly.
You or Your Spouse Changes Jobs
When you change jobs usually your income level goes up or down along with it; this calls for a withholding change on your W-4. Be sure to coordinate with your spouse, depending on who changed jobs, to ensure you're not paying too much or too little in taxes after the employment change.
Your Family Size Increases
When you have a baby or adopt a child into your family, your tax situation changes immediately. You may qualify for a child tax credit, as well as additional allowances per child. Any of these changes could allow you to reduce withholdings and owe less for the tax year.
You Collect Unemployment Benefits or Other Disability
When you’re out of work for any portion of the year, this could reduce the amount you owe in taxes due to your total wages decreasing for the year; this greatly depends also on if you gain employment again during any portion of the year. Also, if you collect any unemployment benefits during your down-time all of the payout or a partial amount may be eligible for taxes. You’ll need to check with the department providing you with the unemployment or other disability to make sure you are following the appropriate tax rules.
Other Life Changes
More often than not, life changes are going to affect your taxes. You may need to revise your W-4 withholding amounts if you’ve moved, purchases a house, etc. It’s important to consider any financial change in relation to your taxes in order to prevent owing more or paying too much initially.