Top 5 Reasons to Adjust Your W-4 Withholding
You change your W-4 anytime. For instance, you can adjust your paycheck withholding to reflect life changes like a new job, marriage, or new child. Adjusting your W-4 can help you avoid a surprise tax bill or possibly net a larger refund.
Key Takeaways
- How much your employer sets aside to pay federal taxes on your behalf is determined by the information you provide on your Form W-4. Having too little withheld from your paychecks could mean an unexpected tax bill or even a penalty for underpayment.
- If you have a side job but don't have any taxes withheld from that income, you can submit a new W-4 to adjust the withholdings at your main job to account for the increase in income.
- If you were unemployed during the tax year, you likely had too much tax withheld while you were working. If you get rehired in the same tax year, you should adjust your withholding on a new W-4 to avoid paying too much tax.
- If you get married or get a divorce during the tax year, your new tax status can affect your tax rate. Be sure to update your withholding accordingly.
What's a W-4 and why should I pay attention to it?
Every time you earn income, you'll most likely owe income taxes on it. If you're an employee working for someone else, your employer will generally withhold federal income taxes from each paycheck and send it to the IRS. How much income tax your employer withholds is based on the information you submit on your Form W-4.
When too much money is withheld from your paychecks, it's like you're giving Uncle Sam an interest-free loan. You eventually get a tax refund when you file your tax return, but the government holds on to your money in the meantime.
On the other hand, if not enough tax is withheld, you might get an unexpected tax bill. You might even face a penalty for underpayment. The key to paying the right amount of tax is to update your W-4 regularly.
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Do this whenever you have a major personal life change.
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The goal is to reduce the potential for a tax bill and have a tax refund at zero or close to it.
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If you count on a big tax refund every year, you should also pay attention to your withholding. How much you have withheld impacts your refund.
All you have to do is fill out a new W-4 form and give it to your employer. They will adjust your income tax withholding based on the information you provide on the form.
Some life events result in more taxes. Others result in credits and deductions that lower your taxes. The list of possible events is long, but here are 5 of the most common reasons to revisit your W-4 withholding.
1. You get a second job
Getting a second job is the most common reason for needing to adjust your W-4. Do this whether you moonlight, have a home business or get another full-time job.
Any time your income goes up, your tax liability will likely go up too, requiring a new W-4. If your extra income comes from a side job with no tax withholding, you could submit a new W-4. It would adjust the withholdings at your main job for the extra income.
2. Your spouse gets a job or changes jobs
A change in household income, up or down, could put joint filers in a different tax bracket. This could mean that one or both of you should change your withholdings. To ensure accuracy, use your combined income to figure out the appropriate withholding.
Use TurboTax's W-4 Withholding Calculator to determine the amount of withholding you should state on you and your spouse's W-4s.
3. You’re unemployed part of the year
If you get laid off from your job and stay unemployed the rest of the year, you likely had too much tax withheld while you were working. So, if you get rehired in the same year, you'll need to adjust for the downtime. To avoid paying too much tax, you should adjust your withholding on a new W-4. We'll show you how to do that below.
4. You get married…or divorced
Tying or untying the knot will most likely change your tax rate, especially if both spouses work. Married people who file jointly get a lower tax rate. They also get other deductions. These benefits are not available to those who file as single. Getting a divorce can take you back to single or head of household status and reverse many tax benefits. If you fail to account for these events on your W-4, your withholdings could be inaccurate.
5. You have a baby…or adopt one
A new baby is more than a bundle of joy. It can generate major tax savings, too.
If your new baby qualifies for the Child Tax Credit, you’ll want to submit a new W-4 form to account for the additional credit. There are a number of requirements for claiming the Child Tax Credit, but if you meet them all you can reduce your tax bill significantly. If you give your employer a new W-4 form, the tax savings will be reflected in your paycheck through reduced income tax withholding.
If you adopt a child, you might also be able to claim the Child Tax Credit for that child. Again, that’s another reason to file a new W-4 form. You can also account for other credits on your W-4 form. So, if you adopt a child and qualify for the Adoption Tax Credit, you can reduce your withholding even more by including the credit amount along with the Child Tax Credit (although you will probably want to file another W-4 form the following year if you won’t be claiming the adoption credit that year).
TurboTax Tip:
If you're eligible for tax credits, you can reduce your withholding to account for the added tax benefits. These credits can include the Child Tax Credit or the Adoption Tax Credit.
How to adjust your W-4 withholding
It's easy to adjust your withholding. As mentioned earlier, you just need to give your employer a new W-4 form.
When it comes to determining what to include on your new W-4 form, you can work it out on paper or with an onlie calculator. The old-fashioned way is to walk through the worksheets on paper that come with the Form W-4 instructions.
But the easier way is to use the TurboTax W-4 Calculator. This simple tool makes determining your withholding easy. Just answer the questions and the withholding amount is computed for you.
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If the W-4 calculator's result differs from your current withholding, ask your employer for a new W-4 form.
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If you're married and both work but earn different incomes, you can use the Step 2(b) — Multiple Jobs Worksheet. It shows how much extra tax the higher earner will need to withhold in box 4(c).
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The new W-4 also lets you estimate how much you plan to deduct on your 1040. You can claim itemized deductions or the Standard Deduction. Then, you put this amount in box 4(b).
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You can report income from other sources (not a job) in box 4(a). This will change how much money your employer withholds from your paycheck.
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.
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