If you’re an income earner, it’s highly likely that you owe income taxes. The amount your employer sets aside to pay federal taxes on your behalf is determined by the information you submit on your Form W-4. But what is a W-4, and why is it important to pay attention to it?
When too much money is withheld from your paycheck, you’re essentially giving Uncle Sam an interest-free loan while receiving a tax refund. Conversely, not having enough withheld from your paycheck could result in an unexpected tax bill or even a penalty for underpayment. To pay the correct amount of taxes, it’s crucial to update your W-4 regularly.
You should make changes to your W-4 when you experience major personal life events, such as getting married, having a child, or buying a home. The aim is to minimize the potential for a tax bill and receive a tax refund that’s close to zero. If you rely on a large tax refund every year, you should also pay attention to your withholding since it directly impacts the amount of your refund.
Certain life events may increase your taxes, while others entitle you to credits and deductions that reduce them. Although the list of such events is lengthy, here are five of the most frequent reasons why you should revisit your W-4 withholding:
If you’re taking on a second job, whether it’s a side hustle or a full-time position, you may need to adjust your W-4 form. This is a common scenario that many people encounter, and it’s important to make sure your tax withholdings are accurate. By adjusting your W-4, you can ensure that you’re not overpaying or underpaying your taxes.
Any time your income increases, your tax liability is likely to go up as well. This is true whether you’re earning more money from your primary job or taking on a second job. If your second job doesn’t have any tax withholding, you’ll need to adjust your W-4 form to account for the additional income.
Submitting a new W-4 to adjust your tax withholdings at your primary job can help you avoid owing taxes when you file your tax return. It can also help you avoid having too much money withheld from your paycheck, which means you’ll have more money available for your other expenses.
Adjusting your W-4 for a second job is a relatively simple process. Here are the steps you’ll need to follow:
Complete a new W-4 form. You’ll need to complete a new W-4 form and submit it to your employer. The form will ask you to provide information about your income, deductions, and credits.
Use the IRS Tax Withholding Estimator: The IRS offers a Tax Withholding Estimator that can help you determine how much you should have withheld from your paycheck. This tool takes into account your total income from all sources and can help you avoid over- or under-withholding.
Consider claiming additional allowances. If you’re taking on a second job, you may be able to claim additional allowances on your W-4 form. This can help reduce the amount of taxes withheld from your paycheck.
Monitor your paychecks: After you’ve submitted your new W-4 form, it’s important to monitor your paychecks to make sure the correct amount of taxes is being withheld. If you notice any issues, talk to your employer about making adjustments.
If your spouse gets a new job, it could potentially change your household income, and that might impact your tax bracket. Therefore, you need to modify your tax withholdings to avoid an unexpected tax bill at the end of the year. Here’s what you need to know about adjusting your tax withholdings when your spouse changes jobs:
Understand Your Tax Bracket
Your tax bracket is determined by your taxable income. The higher your taxable income, the higher your tax bracket. When your spouse gets a new job or changes jobs, it can result in an increase or decrease in household income. This, in turn, can push you into a different tax bracket. It’s important to understand your tax bracket so that you can adjust your tax withholdings accordingly.
Use your combined income to calculate withholding.
To determine the appropriate withholding amount, you’ll need to use your combined income. When your spouse starts a new job or changes jobs, you should consider your new combined income to make sure that you’re withholding the correct amount of taxes. Using your combined income will give you a more accurate picture of your tax situation.
Utilize the W-4 Withholding Calculator.
The IRS provides a W-4 Withholding Calculator that can help you determine the correct amount of taxes to withhold from your paychecks. This calculator takes into account your income, deductions, and credits to estimate your tax liability. It’s essential to use this tool when your spouse changes jobs or starts a new one to make sure that you’re withholding the right amount of taxes.
Once you’ve used the W-4 Withholding Calculator, you should update your W-4 form with your employer. This will ensure that the correct amount of taxes is withheld from your paycheck. Make sure that you and your spouse both update your W-4 forms and use the correct withholding amount based on your combined income.
3. Adjusting Your Tax Withholding After Being Unemployed
If you find yourself laid off from your job and unable to find new employment for part of the year, you may have had too much tax withheld during the time you were working. This can lead to paying more taxes than necessary, which is why it’s essential to adjust your withholding on a new W-4 form if you get rehired within the same year. In this article, we will guide you on how to make this adjustment and avoid overpaying taxes.
Understanding tax withholding
Before we dive into how to adjust your tax withholding, let’s first understand what tax withholding is. Tax withholding is when your employer automatically deducts a portion of your pay and sends it to the IRS to cover your federal income tax liability. The amount withheld is based on your earnings, filing status, and the number of allowances you claimed on your W-4 form.
If you had too much tax withheld, it means that you received less take-home pay during the time you were working, but you will receive a refund when you file your tax return. However, if you are unemployed for part of the year and get rehired, this refund may be delayed or reduced because you will only have a short amount of time to make up for the overpaid taxes.
Adjusting your withholding
To avoid paying too much tax, you should adjust your withholding on a new W-4 form. This form allows you to specify the number of allowances you want to claim, which directly affects the amount of tax your employer withholds from your pay. The more allowances you claim, the less tax will be withheld and the more take-home pay you will receive.
To determine how many allowances you should claim, you can use the IRS withholding calculator, which takes into account your income, deductions, and credits. Once you have determined the appropriate number of allowances, you can submit a new W-4 form to your employer to adjust your withholding.
It’s important to note that if you have multiple jobs or your spouse also works, you may need to make additional adjustments to ensure that you are withholding the correct amount. You can use the IRS worksheet on the W-4 form to help you calculate the appropriate withholding for your situation.
4. The Tax Implications of Marriage and Divorce: What You Need to Know
Are you getting married or divorced? These significant life events can have a profound impact on your tax situation. Failing to account for these events on your W-4 could result in inaccurate withholdings and even penalties. In this article, we’ll explore the tax implications of marriage and divorce and what you need to know to stay on top of your tax situation.
Marriage and Taxes: How it Affects Your Tax Rate
If you tie the knot, you’ll likely experience a change in your tax rate. Married couples filing jointly generally qualify for a lower tax rate and may be eligible for certain deductions that are not available to single filers. These deductions may include:
Increased standard deduction: Married couples filing jointly can claim a standard deduction of $24,800 for the 2020 tax year, which is $4,400 more than the standard deduction for single filers.
Higher contribution limits: If you and your spouse both have retirement accounts, you may be able to contribute more money to them. For example, in 2020, the contribution limit for a 401(k) is $19,500 for individuals, but married couples can contribute up to $39,000 total.
Lower tax brackets: The tax brackets for married couples filing jointly are wider than those for single filers, which means that you may be able to earn more income before moving into a higher tax bracket.
Divorce and Taxes: How it Affects Your Filing Status
If you’re getting divorced, your tax situation will likely change significantly. You’ll need to determine your filing status, which will determine your tax rate and eligibility for certain deductions. There are two main filing statuses for divorced individuals:
Single: If you’re no longer married as of December 31st of the tax year, you’ll need to file as single. This means that you’ll have a higher tax rate than if you were filing jointly and may not be eligible for certain deductions.
Head of Household: If you have children and are the primary caregiver, you may be able to file as head of household. This filing status has a lower tax rate than filing as single, and you may be eligible for additional deductions.
It’s important to note that if you have a divorce agreement that specifies which parent can claim certain tax benefits, such as the child tax credit, you’ll need to follow those guidelines. Failing to do so could result in penalties or even an audit by the IRS.
Updating Your W-4: Why It Matters
Whether you’re getting married or divorced, it’s important to update your W-4 to ensure that your withholdings are accurate. Failing to do so could result in underpayment of taxes and penalties. When updating your W-4, you’ll need to consider factors such as your filing status, the number of dependents you have, and any deductions or credits that you may be eligible for.
5. Maximizing Tax Benefits When You Have a New Baby or Adopt One
Having a new baby is undoubtedly an exciting time for any family, but it can also bring a new set of challenges, including financial ones. Luckily, there are several tax benefits available to new parents that can help ease the burden. In this article, we’ll discuss some of the tax credits and deductions you may be eligible for and how you can maximize them to keep more money in your pocket.
Child Tax Credit
One of the most significant tax benefits available to parents is the Child Tax Credit. This credit can help reduce the amount of tax you owe by up to $2,000 per qualifying child. To qualify, your child must be under 17 years old, a U.S. citizen or resident, and claimed as a dependent on your tax return.
If you are eligible for the Child Tax Credit, you can include the amount that you will qualify for in your W-4 calculations. This can help reduce the amount of taxes withheld from your paycheck, which can give you more money to cover the expenses of having a new baby. However, it’s essential to remember that any amount you receive as an advance payment during the year will need to be subtracted from the credit that you expect to receive on your tax return since you would have already received this money.
Adoption Tax Credit
If you adopt a child, there’s another potential tax credit available to you. The Adoption Tax Credit can help offset some of the costs associated with adoption, such as legal fees, travel expenses, and home studies. For tax year 2021, the maximum credit amount is $14,440 per child.
Like the Child Tax Credit, the Adoption Tax Credit can be used to reduce the amount of taxes you owe. If you have qualifying adoption expenses, you can claim the credit on your tax return. You can also carry forward any unused portion of the credit for up to five years.
Other tax benefits
In addition to the Child Tax Credit and the Adoption Tax Credit, there are several other tax benefits that may be available to new parents. For example, you may be able to claim a deduction for child care expenses if you paid someone to care for your child while you worked or looked for work.
If you are self-employed, you may be able to deduct certain expenses associated with having a new baby, such as the cost of a breast pump or baby supplies. You may also be able to deduct the cost of a home office if you use a portion of your home exclusively for business purposes.
Maximizing your tax benefits
To maximize your tax benefits, it’s essential to keep accurate records of all your expenses related to having a new baby or adopting a child. This can include everything from medical bills and childcare expenses to travel costs and adoption fees. By keeping detailed records, you can ensure that you don’t miss out on any tax benefits that you’re entitled to.
You should also consider consulting with a tax professional who can help you navigate the complex world of tax law and ensure that you’re taking advantage of all the tax benefits available to you. A qualified tax professional can help you determine which deductions and credits you’re eligible for and can help you file your tax return accurately and on time.