The number of allowances listed on an employee’s W-4 form determine how much that individual pays in income taxes. It’s an easy and direct system for people with one job who file as single and claim a standard deduction. However, individuals who don’t fit into this “standard” filing category may not be withholding the correct amount.
If you need to talk to a tax professional about your withholdings or overdue tax bills, call S.H. Block Tax Services today! In the meantime, keep reading to learn more about how adjusting your W-4 withholdings can improve your income management.
What Makes Your W-4 So Important?
If you aren’t withholding enough money for taxes on each paycheck, you could end up owing the state or the IRS when tax season rolls around. From there, this liability could lead to penalties for underpayment or an avalanche of other tax problems.
On the other hand, if you’re withholding too much, you’ll get a refund. This might seem like a good thing, but you could have been putting that money to better use by investing it during the year or using other methods to improve your financial standing.
Regardless of how your tax withholdings are structured right now, they will probably change every so often because of major life events. And although big tax refunds sure feel nice at the time, ultimately, the goal should be to get your tax bill and refund as close to zero as possible, which is why it’s important to adjust your withholdings when those events happen.
Lifestyle Changes That Could Impact Your Withholdings
Certain life changes could lead to you paying more taxes, while others could lead to deductions and/or credits that may lower your overall tax liability. Lots of different life events could impact your tax status, but we’ve compiled a few of the most common for you to review.
A Change in Marital Status
Getting married or divorced can substantially alter your household income. That, in turn, could change your tax bracket, especially if both of you are employed and required to complete a W-4.
The upside of this is that married people who file their taxes jointly qualify for a lower tax rate, among other deductions. However, if you don’t update your allowances, your withholdings might be incorrect, and you won’t receive potentially lucrative and ample tax breaks.
A New Child in the Family
Not only is a new child an exciting and treasured addition to the family, but he or she could also represent a significant tax break if you claim them as a dependent.
In addition, you might also qualify for the Child Tax Credit, the Child and Dependent Care Tax Credit, and other tax breaks that could potentially lower your withholdings to compensate for the new benefits. And if your new addition to the family came by way of adoption, there’s an additional tax credit for that.
Overall, if you don’t update your withholdings after bringing a new child into the family, you might end up with a substantial tax refund. That may be better than a big tax liability, but it’s still not ideal.
A Change in Household Income
Whenever joint filers’ combined household income changes, they could end up in a new tax bracket (either lower or higher). The change in income could be due to one of the filers getting a second job, a spouse changing jobs, or even a new promotion.
Regardless of why or how your income changes, be sure to combine your income when computing your allowances. From there, you can either have one spouse claim all the allowances or divide them between your two W-4s.
A Period of Unemployment
Losing your job can create major financial and emotional challenges, but it’s important to remain proactive in your search for a new position.
Individuals who lose their job and then remain unemployed throughout the rest of the year often have too much of their income withheld for taxes. Individuals who are re-hired before the end of the year, however, will need to adjust for their period of unemployment.
To prevent overpaying on your taxes, you might want to increase your allowances on a new W-4. For help with this, please contact our offices as soon as you find new employment.
Need Help Managing Your Withholdings or Resolving Tax Problems? Contact S.H. Block Tax Services Today!
The major life changes listed above could lead to serious confusion when attempting to file your taxes in April. If you’re wondering how to update your W-4 withholdings correctly or how you can get the most out of each paycheck, please contact S.H. Block Tax Services today by calling (410) 793-1231 or completing this brief online form.
With more than 100 years of combined experience, our staff has helped thousands of individuals and families get right with the IRS and the state of Maryland, and we would love the opportunity to do the same for you. Depending on your unique circumstances, certain liabilities may apply, so please reach out today to avoid penalties and get on the right track.
The content provided here is for informational purposes only and should not be construed as legal advice on any subject. Please read our full disclaimer here.