Are you one of the tax payers that received a large tax refund in April? If you received more than $1000 it is time for you to go back and adjust your tax withholdings. The term “withholdings” is referring to the amount of taxes that your employer is taking out of your salary. This is something that is going to cause you to have to deal with your payroll department.
The good news is once you understand how tax withholdings work it will be easy to adjust and you will be able to control your money and can avoid giving Uncle Sam and interest free loan. However, it is important to make sure that you adjust your tax withholding correctly so you do not end up owing them money which will lead to penalties and you having to figure out how you are going to pay your bill when April rolls around again.
The first thing you are going to have to do to adjust your withholdings is to get your W-4 form copy. Additionally, you are also going to want to have your most recent pay stub, your tax return from last year, and your W-2 from last year.
You will find the form is brief and it covers whether you itemize or go for the standard deduction. It also includes the dependents you have claimed and whether or not you are expecting interest or a dividend income. Lastly, it also covers your filing status. Once all the previously mentioned things have been calculated you will have formulated your withholding allowance.
When You Need to Review/Adjust Your Withholding
- Marriage or divorce – If you have married or gotten a divorce you are going to have to assess how your taxes are going to be impacted. If this event causes you to have to add on an additional dependent that is getting more than 50% of their support from you an extra exemption is available for you. Furthermore, if one of these events takes place you are also going to have to review your beneficiaries and your retirement accounts.
- Purchase of a home – This is another event that causes a large impact on your withholdings. For example if you have a mortgage that costs $250,000 at a 4.5% 30 year fixed rate with $11,000 in interest the first year and $4,000 for property tax you are probably near the standard deduction requirement if you have not already met it.
So your mortgage is going to allow you to have 4 additional allowances on your W-4. This means you need to let your payroll department know not to tax you on the money. If you are married you will also want to consider reviewing your withholdings.
Overall, if any major change takes place in your life you need to review and calculate your withholdings.