Your W-4 form determines how much your employer withholds from your pay to cover your income tax obligations. Having too much withheld would mean getting a refund come tax-filing time, but it’s also akin to giving the government an interest-free loan in the interim. Contrarily, having too little withheld could mean you have a surprise tax burden to fulfill when taxes are due or risk incurring a penalty.
Certain events can require you to change your withholdings. Other times, a change may be optional and simply wise to consider. Whenever you change your withholdings on your W-4, the goal is to have just the right amount withheld. This would mean you’d receive little to no refund at all, but it would also minimize your chances of having a big tax bill to pay.
Major life events can affect your taxes in a variety of ways, from raising your tax bracket to qualifying you for more tax deductions and credits. Knowing how to adjust your W-4 withholdings is critical to garnering all the possible tax benefits of your significant life changes and none of the avoidable burdens.
Discrepancy in Current Withholdings
Check your most recent pay stub to see how much your employer withheld for taxes. If you think it may be too much or too little, you may want to adjust your W-4 withholdings to correct that. Similarly, if your last tax bill or refund was too high, it could mean your W-4 withholdings need adjusting.
Change in Employment
If you or your spouse change employment, a change in one or both of your W-4 forms may be required or simply helpful. Any time you start a new job, you must fill out a W-4 form for your employer. When you take on a second job, you’ll need to fill out a second W-4. If that job is freelance or gig work or otherwise has no tax withholding, you could adjust your W-4 at your primary job to account for it.
Be aware that, even if you haven’t changed jobs, if you’ve held the same job, or at least worked for the same employer since before the passage of the Tax Cuts and Jobs Act, you should update your W-4 as well.
You’ll also want to consider adjusting your W-4 withholding if, due to earning less than the standard deduction, you owed no taxes the previous year and don’t expect to owe taxes for the current year as well. In this event, you can simply turn in a W-4 form with the top and bottom filled out and “Exempt” written in the spot beneath line 4(c).
If you lose employment and remain unemployed for a good part of the year, you could find you had too much withheld from your previous job. If you get hired by a new employer after that, you might want to fill out your new W-4 to account for the overage you’ve already paid.
If your spouse’s employment status changes and the two of you file your taxes jointly, your tax bracket could change as a consequence. To adjust your W-4 to compensate, calculate it as a factor of your combined earnings.
Change in Marital Status
If you get married or divorced, you’ll likely want to change your W-4 to reflect your changes in tax bracket or filing status. If you and your spouse, or ex-spouse depending on the circumstances, both work, making the proper adjustments could impact your tax obligation tremendously.
The tax rate for married couples filing jointly is lower than it is for married couples filing separately. The potential deductions available, on the other hand, are more abundant.
A divorce can require you to change your filing status back to single or head of household, and it can undo many tax advantages of marriage.
Whether you or your spouse give birth to a new baby or you adopt one, it can affect your taxes, which means your withholdings could merit adjusting. A new baby qualifies you for many child-related tax benefits, including the Child Tax Credit. This might compel you to have less withheld from your paycheck, knowing your tax burden will be lower at the end of the year.
As a result of the American Rescue Plan, the Child Tax Credit is currently $3,600 for qualifying children under six years old and $3,000 for qualifying children between six and 17 years old. Even if you don’t qualify under the lower income limits that also came with the plan, you still may qualify for a $2,000 child tax credit based on the income limits and phase-out amounts in effect before the plan’s passage. Note that, if your child turns 17 during a given tax year, you’ll want to adjust your withholdings to reflect that as well.
Be aware, however, that if you receive any portion of your Child Tax Credit as an advanced payment, you’ll need to account for this amount when you calculate how much to adjust your W-4 to compensate for the credit’s impact on your tax return.
Likewise, if you adopt a child, there may be an additional tax credit for which you qualify. This, too, can prompt you to reduce your withholding to keep from having too much taken out of your wages.
Calculating Your W-4 Adjustment
If you need to adjust your W-4 withholdings for any reason, there are a few ways to determine how much to withhold. One quick and easy way to get an idea of how much may be ideal to have withheld is to use the online Tax Withholding Estimator the IRS offers. This tool looks at your marital status, income, adjustments, deductions, and tax credits to gauge how much you should have withheld. This handy calculator is also useful if you have a side job you don’t want your primary employer to know about. This way, you can have the necessary extra withheld, and your boss will simply think you want a bigger refund at tax time.
If you have more than one job, the new W-4 form has a helpful Multiple Jobs Worksheet on one of its pages to help you calculate your withholdings from each.
If you and your spouse both work and earn relatively comparable incomes, you both could fill out the top and bottom parts of the form and check box 2(c) for married couples in just this scenario. However, both of you have to do it on your respective W-4 forms for it to work.
A tax advisor in Charlotte knowledgeable and experienced in when and how to change W-4 withholdings can also help you navigate the tax implications of the major events taking place in your life. Scott Boyar is the best accountant in Charlotte for this job, and the reason is simple: in addition to being a Charlotte NC accountant, he’s also a Charlotte NC bookkeeper. This means he has specialized knowledge of the relationships between financial records and tax documents. For a CPA in Charlotte to help you adjust your W-4, contact Scott Boyar online or call 704-527-2725.