Maximizing Tax Withholdings
While changes can be made at any time to a W-4 form, the end of the year is a good time to review tax withholdings. Life-changing events, like having a baby or buying a house, might mean it’s time for an update.
Withholdings are the
amount an employer takes out of a paycheck to pay the Internal Revenue Service
(IRS) on their behalf. That amount can be adjusted as an individual deems
necessary, whether too much or not enough was taken out, and can be modified by
completing a new W-4, an Employee’s Withholding Certificate.
To change a W-4, the
Adjusted Growth Income (AGI) is needed, which can be found on the prior year’s
tax return. Online tools, like the Tax Withholding Estimator at IRS.gov or the W-4
Calculator for TurboTax, can help estimate
withholding amounts.
Having too much
withheld from a paycheck results in receiving a tax refund, but less money in
your pocket throughout the year. Not taking out enough, however, could mean an
IRS tax bill or even a penalty for underpayment. Therefore, regularly updating
a W-4 is an important financial management strategy.
According to TurboTax, in 2020, the IRS
rolled out a new system for completing a W-4 form, making updates or
modifications easier and more convenient. Complicated worksheets have now been
replaced with more straightforward questions.
Other than being
easy to modify, here’s a list of the reasons to consider adjusting your W-4,
according to Nerd Wallet:
- New
marriage or divorce
- New
baby
- New
house
- Significant
change in salary
- Only
working for part of the year
- Significant
amount of dividend income
- Freelance
work on the side
If any of those
listed above occur within the year, it’s important to ensure withholdings are
reflected as such.
How to Fill Out a W-4
Filling
out a W-4 form and keeping it updated is made even easier through various online
resources geared towards calculating the appropriate withholdings, such as the
IRS’s Tax Withholding Estimator, TurboTax’s Withholding Calculator, or these basic
steps from NerdWallet to get started in
the right direction:
- The easy part – Simply
download the form
from IRS.gov and start by filling
out your basic personal information.
- Provide dollar estimates – The new 2020 version asks for a dollar estimate for the payroll
system to use, rather than asking participants to choose several
allowances.
- Whether you’re single with multiple jobs or married and filing
jointly, while both of you are employed, keep these things in mind – A W-4 is usually required for
each job. For the highest paying job, fill out steps 2 to 4(b) on the W-4.
Leave those sections blank on the W-4 forms pertaining to the lower paying
jobs. If you and your spouse make about the same salary at each job, and
you’re filing jointly, there is a spot to indicate as such on the W-4. The
trick is to make sure both spouses check the box on each of their forms.
- If you are exempt from withholding – Write “exempt” in the space below step 4(c). You will
still need to fill out steps 1 and 5, as well as fill out a new W-4 every
year you plan to claim exemption from withholding.
- On the new 2020 form, you can
select the “Head of Household” status – This was not an option before this year. Just be sure to fill
out the 2020 W-4 if you choose to file this status for your tax
withholdings to line up more accurately with your tax liability.
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