Tax tips are great ways to help maximize your return and make sure you don’t have to take money out of pocket when it comes time to file your taxes. By now, you should have filed your 2017 tax return. This can be a stressful time, as you nervously await your accountants results and wonder whether you’ll have to pay, or you will get a nice chunk of money coming your way.
Even if you have brought in a decent return in years past, there are many common lifestyle changes that can impact your tax return and change your tax liability. Buying a new house, getting married, having children, and getting a new job are a few to name. Your main goal should be to land somewhere in the middle and avoid being caught off guard by either an unexpected tax bill or a huge refund. If you’ve been told to change your W-4 withholding, there can be a few reasons why. Let’s check them out.
All About Your W-4
The rule of thumb when it comes to paying taxes is that every time you earn income, you owe taxes. The W-4 Form is what determines how much you owe. When you work directly for an employer, they deduct taxes based on what you fill out in your W-4. The standard taxpayer is considered someone who files that they are single, have one job, and claim a standard deduction. Most people who lie outside of the scope of the standard deduction seem to face complications when it comes to their W-4. For these taxpayers, they are often paying too much or too little.
Most taxpayers who have too much tax withheld think this is a beneficial move. After all, at the end of the year, you get a nice big refund that is somewhat of a savings. Surprisingly, this isn’t as great a move as you may think. When you have too much money withheld, you give the government an interest-free loan that may be put to better use within your home or family. You can put extra money into your household every week, invest your money in something that brings in interest, or pay off extra debt.
On the other end of the fence are those who have too little taken out. The consensus is that this is a bad thing and most financial advisors would agree. Because when you submit your taxes, you end up with an unexpected tax bill or even a penalty for underpayment. Whether you have too much or too little taken out, the fact remains. There are better ways you can manage your money. So, how can you start by better managing your tax withholdings?
They key to paying the right amount of tax is to regularly update your W-4. Whenever there is a major personal life change, talk to your accountant or financial advisor about what steps you should take to adjust your withholding. Your goal should be to bring your tax bill or refund as close to zero as possible. If you have set up your returns so that you can plan on that big tax refund every year, you should also pay attention to your withholding. So, what’s the bottom line? Your W-4 withholding impacts your tax refund, so you need to pay careful attention to how it’s filled out.
Tax Tips on Reasons Why You Should Adjust
Life events result in the need to pay more or less taxes. Some major life changes results in the need to pay more taxes while others entitle you to credits or deductions. Here’s a list of the 5 most common reasons you should adjust your W-4 withholding.
You get another job. Getting a second job, or changing your job, is one of the most common reasons to adjust your W-4. Any time your income changes, so does your take liability. Even if you add on additional income from a job that doesn’t offer W-4 withholding, you should adjust the W-4 at your main job to account for your added income.
Your spouse changes employment. Speaking of income, your spouse may play a major role in your household income as well. If you file jointly, it’s important to modify your allowances if your spouse gets or changes their job. To ensure you have the right withholding, supply your financial advisor with an accurate figure of your combined incomes. They will advise you on how to split your W-4 allowances to make sure you have the right amount taken out for taxes.
You go through a period of unemployment. If you get laid off from your job, or go through a period of unemployment, there’s a high chance you had too much taxes taken out throughout the year. And, if you get rehired in the same year, you need to adjust for your downtime. Changing the allowances on your W-4 can account for downtime and help even out your taxes.
Your marital status changes. Getting married, or getting divorced, is a definite tax rate changer. This is especially true if both spouses work. Married couples who file jointly qualify for a lower tax rate and other qualified deductions. Additionally, getting a divorce brings you back to single status and reverses many tax benefits you received when married.
You have or adopt a child. Adding to your family is more than just the joy that comes with all the love you have for this new child. It has a major impact on your taxes. When you add a child to your family, you can claim additional allowances when listing them as a dependent. You may also qualify for other credits and deductions such as the Child Tax Credit, Child Care Tax Credit, Educational Credit, and more. Adopting a child also has a separate Adoption Credit that comes with it.
Adjusting your W-4 withholding is easy. You can do it on paper or electronically. Keep an open line of communication with your accountant or financial advisor when it comes to major life changes. They will easily be able to walk you through the changes you should make to ensure you are paying the right amount of taxes all year long.