When should you adjust your withholdings?
Tax season is here, and it might be time to take another look at your withholdings. There are a lot of different reasons to adjust your withholdings. From getting married or welcoming a child to your family, or getting a new job or raise, taking a second look at your withholdings near the beginning of the year can help save you a lot of potential headaches come next tax season.
Here are some key times when you should adjust your withholdings:
1. Owed taxes last year
Paying a large tax bill is never welcome and sometimes means that your withholdings weren’t accurate. If you owed taxes in the year prior, make sure to adjust your withholdings for the next year. If you aren’t sure how many exemptions you should claim or the correct amount of withholdings, you can use the IRS paycheck checkup tool.
2. You got a big tax refund
Similar to paying taxes, if you got a big tax refund last year, you should adjust your withholdings and claim fewer exemptions as a big refund means you had too many taxes withheld from your paycheck. It’s much better to make sure that extra cash is benefitting you through investments or a savings account instead of sitting with the government.
3. You had a major life event
Did you get married, welcome a child to your family, get divorced or experience some other big life event? Then it’s time to adjust your withholdings. These life events will adjust your withholdings and it is best to stay on top of them.
4. Started a second job
Did you start a second job or earn extra income through a business this year? It’s a great time to look at and tweak your withholdings. Since the additional income will increase your income, you will owe more in taxes. By adjusting your exemptions, you can offset the higher taxes.
If you are married and in a dual income situation, make sure that you calculate the exemptions based on your combined income, especially if your spouse makes significantly more than you do.
How to Adjust Your Withholdings
Your human resources or payroll department, or your payroll service provider, can help you adjust your W-4. Many times, there is an online portal but smaller companies may still need to have you fill out the IRS form. Make sure to double check the IRS tax withholding calculator so you put down the correct exemptions.
Still have questions? The MCK team can help! Contact our offices today.