If you work for an employer that automatically withholds taxes from each paycheck, then you have the ability to adjust how much is withheld by adjusting the exemptions on IRS Form W-4. This is important to review because many different changes in your life could impact the amount of money you should have withheld.
Events That May Trigger Change
There are many different circumstances that can trigger a need to change your withholding:
- Having a child
- Getting married or divorced
- Buying or selling a home
- An older child no longer able to be claimed as a dependent
- Changes in retirement or college savings contributions
- Change in employment
All of these events can play an important role in your tax situation. Some may require that you pay more taxes, while others may entitle you to additional tax breaks that require fewer taxes to be paid.
Withhold Enough, but Not Too Much
Did you receive a sizeable tax refund last year? Then you are withholding too much. Were you surprised to find out that you owed the IRS money? You didn’t withhold enough and you may even owe a penalty. Your goal should be to strike a balance so that you receive little or no refund. If you’re withholding more than necessary, you’re taking money out of your pocket each paycheck and giving the IRS a free loan with your money.
The W-4 form has instructions and a worksheet that can walk you through the exemptions, but that can be a bit intimidating. Fortunately, the IRS has a useful tool that can help you estimate what you should claim on your W-4 so that you don’t have to guess: IRS Withholding Calculator. This online tool can simplify this process for you.
Don’t Forget State Tax Withholding
The W-4 will take care of your federal tax withholding, but you should check with your employer to see if any changes need to be made to your state withholding as well. Every state is a bit different, but the form should have basic instructions that can help you select the right withholding without much trouble.