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Although you can redo your tax deduction at any time, certain lifestyle changes, such as getting married, having a baby, or taking on a second job, may require you to make adjustments immediately.
You can avoid unpleasant surprises when tax season approaches by adjusting your withholding tax after changes have occurred.
Here’s what you need to know about the best time to adjust your withholding tax.
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What is withholding tax?
“Withholding” is the portion of your income that your employer collects from your paycheck and submits to the IRS on your behalf. At the beginning of the year, you will receive a Form W-2, “Wage and Tax Statement,” which shows the wages you earned and the amounts withheld for taxes during the previous year.
Your employer bases the withholding amounts on the information you provided on Form W-4, Employee Withholding Certificate. On your W-4, you provide your filing status, dependents, and income from all jobs. You can also indicate if you want additional taxes withheld from your paychecks.
Read more: What is withholding tax?
When do you have to adjust your withholding tax?
You should consider changing your withholding tax whenever you have a major life event.
Timing is everything. If you wait too long, say until the end of the tax year, the adjustment may have little or no effect on your taxes.
Here are some life events that can trigger a change in your restraint.
Marriage or Divorce
If you recently entered into or broke up a marriage, you should adjust your tax withholding because your tax rate largely depends on your filing status. If you are married and choose to file jointly as a couple, there are often tax advantages. You must therefore file a new W-4 to reflect the change in your filing status. Then you can expect to have less tax withheld.
If you and your spouse choose to file your taxes separately, your tax deductions will be higher.
Second job or secondary income
The moment you get a second job or receive additional income from a side business, you must adjust your tax withholding. The same goes if your spouse starts earning extra money on the side.
As your income increases, your taxes also increase. But if you have multiple jobs and don’t itemize the deductions, the IRS allows you to take only one standard deduction.
“Therefore,” says the IRS, “if you have more than one job at a time or if you are married and file jointly and you and your spouse work, more money should generally be withheld from the combined salary. for all jobs than what would be retained if each job were considered on its own.
If you don’t adjust your withholding, you run the risk of having to pay taxes and penalties on your next return. You can account for multiple jobs and additional income on your W-4.
When you have secondary income from self-employment, you have to pay both income tax and self-employment tax. You can use Form W-4 to withhold more from your 9 to 5 pay to pay taxes that will be owed on your secondary income. Use the IRS Withholding Tax Estimator or Publication 505, “Tax Withholding and Estimated Tax,” to determine the amount to withhold.
New family member
If you’ve recently had a baby or adopted a child, it’s time to change your tax deduction, as the new addition to your family will lower your tax bill by qualifying you for the Child Tax Credit. You must also make a deduction adjustment once you are no longer able to claim an older child as a dependant.
Here are some other occasions when you should consider changing your deduction:
- You received a large tax refund or you owed a large amount of tax since your last tax return.
- You want additional taxes to be withheld from your salary. (Some people like to receive a high tax refund, but when you increase your withholding, you are effectively giving the IRS an interest-free loan.)
- You expect to itemize the deductions instead of claiming the standard deduction on your next tax return.
How to check your withholding tax
Once you’ve determined it’s time to revise your tax withholding, do a tax checkup before proceeding.
You can use the IRS Tax Withholding Estimator to determine how much tax to withhold from your paychecks. Choosing the right amount allows you to avoid an excessive tax refund or a heavy tax bill.
To use the withholding tax estimator, it helps to have a recent pay stub on hand (and you’ll also need it from your spouse if you’re filing jointly). You should also know your income from all sources, including any second job or self-employment income.
If you have a complex tax situation, such as receiving a pension or being a non-resident of the United States, you should use Publication 505 instead of the Withholding Estimator.
How to adjust your tax withholding
After determining the exact amount you need to withhold, you should update your W-4 form and resubmit it to your employer.
You will need the following information to complete the form:
- Your name, social security number and address
- Your income (including that of your spouse)
- Your dependents and their ages
- Any additional amount of money you want to withhold from your paychecks
- The total itemized deductions you expect to claim on your taxes, if you plan to itemize
Taking the time to adjust your tax withholding can ensure that you don’t pay too much or too little tax. By following the steps listed above, you can get closer to breaking even at tax time.
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