In the United States, the pay-as-you-earn (PAYE) tax system requires individuals to pay estimated income tax throughout the year, which is then reconciled on tax day the following year. Employers are mandated by the federal government to withhold a portion of employees’ income for taxes by deducting from their paychecks.
Employers determine the amount of tax withheld based on the information provided by new employees in Form W-4. If excess tax is withheld, employees receive refunds.
However, circumstances can change throughout the year, making it necessary to adjust the amount of income withheld.
Events That Trigger Changes
Various factors influence the amount of income withheld for taxes, including marital status, income level, desire to withhold extra funds, and qualifying for allowances.
Changes in household situations, such as having a child or a spouse losing a job, can impact the taxes you owe. Adjusting withholding in such scenarios can prevent overpayment of taxes.
Marriage
Marriage can affect taxes differently based on factors like a spouse’s income. It’s important to consider whether filing jointly or separately is more beneficial.
Divorce
Divorce impacts household income and alimony, with changes in tax treatment of alimony starting from 2019 under the Tax Cuts and Jobs Act.
Birth or Adoption
Having a child or adopting affects taxes by adding dependents, potentially reducing tax burden. Adjusting withholding promptly can maximize credits and deductions.
As children become independent, consider adjusting withholding since dependency claims may change.
New Home (or Other Major Purchases)
Buying a home can lead to tax benefits that influence withholding. Changes in credits, deductions, and purchases impact the taxes owed.
Major expenses like education costs or charitable donations also affect withholding and can result in tax savings.
Big Increases in Non-Wage Income
Additional income sources like investments or dividends require adjusting withholding to account for capital gains tax obligations.
Working Two Jobs
Holding multiple jobs can lead to inconsistencies in withholding. Changes in income streams necessitate proper withholding adjustments to align with tax brackets.
Losing a job or income stream affects withholding, allowing for adjustments in withholding and claim of allowances.
Getting Your Withholding Right
The IRS provides tools and forms to accurately estimate and adjust tax withholding, ensuring proper withholding alignment with your circumstances.
Here are steps to adjust your withholding accurately:
- Estimate federal income taxes using the IRS Tax Withholding Estimator.
- Contact your employer to revise federal income tax withholding based on the estimated changes.
- Complete necessary steps on Form W-4 if you have multiple jobs or dependents.
- Enter any additional income and deductions on the form for accurate withholding adjustment.
Is It Better to Withhold More or Less Taxes?
If you prefer to avoid owing taxes during tax filing, withholding more income throughout the year is advisable. However, overpaying in advance may cause missed investment opportunities.
Will Changing Withholding Affect My Paycheck?
Adjusting tax withholding impacts your take-home pay, influencing your net paycheck amount without altering gross pay.
How Do I Update My Withholding Amount?
You can update your withholding by submitting a revised Employee’s Withholding Certificate (Form W-4) to your employer.
The Bottom Line
It is crucial to adjust withholding as life changes occur to avoid overpayments or unexpected tax bills. By optimizing your withholding, you can ensure proper tax management and financial planning.