Review your Federal Withholding Tax Form TODAY
Employee withholding is a way that an employee can pay their taxes before Tax Day. Some of your estimated Federal taxes are withheld from every paycheck and sent to the Government. At the end of the year, your W-2 tells you how much you pre-paid the government, and when you complete your taxes, you’ll find out how much you still owe the government, or if you’re getting a return on money that was overpaid.
If you’re anything like most Americans, the amount that you owe or will receive on your return is a surprise. Occasionally, it’s even a disappointment. It can be a mystery and a stressful one at that. But what if it doesn’t have to be?
Updating your W-4 Form
When you start a new job, you fill out several documents, including your Federal employee tax deduction form, known as your W-4 form. You’re required to fill out the form at least once, but you’re not limited to how many times you can fill it out, updating and changing your Federal withholding tax as necessary.
You should update your withholding whenever your tax situation changes. Getting married or divorced comes to mind, of course, but also if your spouse or partner leaves or enters the labor market or their wages change. Having a baby or adopting a child will change your tax situation, as does having a child grow up and become responsible for their own taxes. You will also see a change in your tax situation if you become responsible for the care of a parent or another relative not able to live independently.
There are more reasons to make adjustments to your tax withholding than just changes in your family situation, of course. You should also update your employee withholding at times when your income changes, such as gaining, or losing, additional income from a side gig or a second job. Non-wage income, such as investment income, profits from a start-up business and interest income will also affect your tax situation. And it’s especially important to update your withholding to take full advantage of tax breaks when you purchase a home, pay for higher education, and make charitable contributions.
How do you Update your Withholdings?
Anything having to do with taxes can be confusing and stressful. Fortunately, in this case, the government understands that. The IRS has created a withholding calculator and made it available to help W-2 wage earners determine the best way to update their W-4 forms.
Using the IRS withholding calculator is anonymous. You won’t need to give the IRS your name, Social Security number, or employer, but in order to use the calculator, you’ll need your most recent paystub. If you intend to file taxes jointly, you should also have a copy of your partner’s paystub as well. Once you enter all of your information, you’ll need to tell the IRS what you would like the ultimate outcome to be at the end of the year. The calculator will tell you how, and when, you need to change your withholding to maximize your return or to minimize the amount that’s withheld from each check. You can update your W-4 as often as you like.
Be Careful when Claiming Exempt
When you fill out your W-4 form, you can claim “exempt” and Federal taxes will not be withheld from your taxes. In order to be exempt from Federal taxes, you must not have owed Federal taxes for the previous year, and you must expect to not owe Federal taxes for the current year. It’s not illegal to claim exempt on your W-4, however, it can be problematic. If you declare yourself exempt on your W-4, you may end up with a sizeable tax bill. To avoid this, be sure to use the IRS withholding calculator.
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