Maximizing Tax Withholdings
While changes can be made at any time to a W-4 form, the end of the year is a good time to review tax withholdings. Life-changing events, like having a baby or buying a house, might mean it’s time for an update.
Withholdings are the amount an employer takes out of a paycheck to pay the Internal Revenue Service (IRS) on their behalf. That amount can be adjusted as an individual deems necessary, whether too much or not enough was taken out, and can be modified by completing a new W-4, an Employee’s Withholding Certificate.
To change a W-4, the Adjusted Growth Income (AGI) is needed, which can be found on the prior year’s tax return. Online tools, like the Tax Withholding Estimator at IRS.gov or the W-4 Calculator for TurboTax, can help estimate withholding amounts.
Having too much withheld from a paycheck results in receiving a tax refund, but less money in your pocket throughout the year. Not taking out enough, however, could mean an IRS tax bill or even a penalty for underpayment. Therefore, regularly updating a W-4 is an important financial management strategy.
According to TurboTax, in 2020, the IRS rolled out a new system for completing a W-4 form, making updates or modifications easier and more convenient. Complicated worksheets have now been replaced with more straightforward questions.
Other than being easy to modify, here’s a list of the reasons to consider adjusting your W-4, according to Nerd Wallet:
- New marriage or divorce
- New baby
- New house
- Significant change in salary
- Only working for part of the year
- Significant amount of dividend income
- Freelance work on the side
If any of those listed above occur within the year, it’s important to ensure withholdings are reflected as such.
How to Fill Out a W-4
Filling out a W-4 form and keeping it updated is made even easier through various online resources geared towards calculating the appropriate withholdings, such as the IRS’s Tax Withholding Estimator, TurboTax’s Withholding Calculator, or these basic steps from NerdWallet to get started in the right direction:
- The easy part – Simply download the form from IRS.gov and start by filling out your basic personal information.
- Provide dollar estimates – The new 2020 version asks for a dollar estimate for the payroll system to use, rather than asking participants to choose several allowances.
- Whether you’re single with multiple jobs or married and filing jointly, while both of you are employed, keep these things in mind – A W-4 is usually required for each job. For the highest paying job, fill out steps 2 to 4(b) on the W-4. Leave those sections blank on the W-4 forms pertaining to the lower paying jobs. If you and your spouse make about the same salary at each job, and you’re filing jointly, there is a spot to indicate as such on the W-4. The trick is to make sure both spouses check the box on each of their forms.
- If you are exempt from withholding – Write “exempt” in the space below step 4(c). You will still need to fill out steps 1 and 5, as well as fill out a new W-4 every year you plan to claim exemption from withholding.
- On the new 2020 form, you can select the “Head of Household” status – This was not an option before this year. Just be sure to fill out the 2020 W-4 if you choose to file this status for your tax withholdings to line up more accurately with your tax liability.