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10 Reasons You May Want to Adjust Your Withholding*

If you’ve been with the same employer for a number of years, you may not even remember setting up the number of allowances you wanted your employer to figure when calculating how much tax to withhold from your paycheck.  The form you filled out is called a W-4. There’s a good chance that your situation may have changed since you first filled out that form, so it’s a good idea to re-evaluate your situation each year to determine whether you should adjust your withholding. If any of the following scenarios apply to you, you may want to reevaluate your withholding by submitting a new W-4 to your employer so they can adjust the amount of tax they are withholding.

  1. You have a change of employment– If you’ve taken a new job, or had a period of unemployment, you’ll want either to account for a change in pay, or to adjust for the loss of income.
  2. You received a big refund last year– It’s always nice to get a windfall of money, but if you are receiving a sizeable refund each year, you are essentially giving the government an interest free loan. You could be using that money throughout the year in the form of a bigger paycheck and even earning interest on it, using it to pay down debt, or avoid having to use credit in the first place. 
  3. You owed money when filing your tax return– It’s no fun learning that you owe taxes. If you owed more than $100, you may want to adjust your withholding to have more taken out of your paycheck.
  4. You got married or divorced– a change in marital status will almost always cause a change in your tax status, especially if both spouses work.
  5. You have a child– Having an addition to the family will probably increase your household expenses, but will generally reduce your tax liability by adding an additional exemption and currently qualify you for a tax credit. You can learn more by reading IRS publication 972.
  6. You adopt a child- In addition to qualifying for exemptions and credits because of your new family member, there is an additional adoption credit available for some families that otherwise might not be able to afford to adopt a child. For details on this credit, refer to IRS Topic 607.
  7. You can no longer claim a dependent that you claimed last year– If any of your children no longer qualify to be claimed as a dependent, be sure to adjust your withholding to avoid owing tax. Between the loss of an exemption and, more importantly a tax credit, you could owe considerably more than in past years. 
  8. You get a second job– Any time your income increases, your tax liability generally increases as well. If you are working for someone else, you can have them withhold the appropriate taxes, but if you are working for yourself, you could account for the added tax burden by adjusting your W-4 at your primary place of employment.
  9. Your spouse gets a new job– If your spouse has a change in employment, make sure you are figuring out your withholding based on your combined incomes. You can accomplish this by having one spouse claim all or dividing it between your W-4s.
  10. You purchase your first home– If you have recently purchased your first home, you will have additional deductions for mortgage interest and property taxes. You will want to increase the number of allowances to account for this, but make sure you are itemizing your deductions if you haven’t in the past.

Keep in mind that you can change the number of allowances you claim on your W-4 at any time during the year, however the later in the year you do so, the less impact it will have on the amount of tax that your employer withholds. Ideally, you should claim the number of exemptions that allow you to have enough tax withheld from your paycheck over the course of the year so that you neither owe tax, nor are due a refund when tax time rolls around.

To determine the optimum number of exemptions for your situation, you can use the Withholding Calculator on the IRS website. If any of the above scenarios apply, you can read more detailed information on how to adjust your withholding by referring to IRS Publication 919. If you still have questions, you may want to consult a tax professional or the IRS. The IRS provides free tax help by telephone, in person, or via the Internet. For more details, go to http://www.irs.gov.  

*This is not intended to be, and is not tax advice. It is always wise to check with a tax professional if you have any questions before filing your taxes.  

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