Did you know that common lifestyle changes such as starting a new job or getting married can automatically change your tax liability? Nobody wants to get caught off-guard by a higher-than-expected tax bill. That’s why you may want to consider adjusting your W-4 withholdings.
What is a W-4?
If you make income as an employee, you will be required to fill out Form W-4 by your employer. This determines the amount of taxes you will pay with each paycheck. Ultimately, how much you withhold is up to you, but ideally, you want to find the right balance that nets you a paycheck you can live on but doesn’t end up costing you more come tax season.
The truth is most people withhold too much or too little with their W-4. It is something you should review regularly with a qualified tax expert and adjust as needed. Here are 5 of the most common reasons why you would want to update your W-4 withholdings:
1. Change in Marital Status
When getting married or divorced, you will have to provide your employer with a new Form W-4. The federal tax brackets are larger for couples, so you usually won’t owe as much in taxes after you tie the knot than you did when you and your spouse filed single returns.
2. Second Job
Many people work more than one job. When you take on a second (or third) job with another employer, you will need a new W-4 for each one. If you start a home business, you may want to increase your W-4 withholdings from your main employer to offset tax liabilities you will have from the additional income.
If you have a baby or adopt a child, it is not only a major life event, but it is a major tax event as well and your W-4 withholdings should be adjusted. Likewise, if you have a dependent that grows up and is no longer part of your tax liability, you will want to adjust your W-4 accordingly.
4. Spouse Job Change
Whenever your household income changes, whether it’s your job changing or your spouse’s, W-4 adjustments should be made. Make sure the tax you withhold is relative to the total income you plan to receive.
If you are laid off or spend part of the year unemployed, you probably will have had too much tax withheld. However, once you start a new job, the W-4 will need to be adjusted to make up for the downtime.
Finding the right W-4 withholding amount can be tricky, so it never hurts to talk with a tax expert who can help you navigate the process and get the most out of your tax return. Ferguson, Timar & Company is here to help with all your tax planning and preparation needs. Contact us today for more information or to schedule your personal income tax consultation.