Income tax withholding is something that will change along with your life circumstances. It is the amount of money your employer takes out of your paycheck to help cover your income taxes. The withholding amount is determined by how you fill out the Form W-4, which is used by your employer to determine how much to withhold from your pay. The more you withhold over the year, the less likely you will pay at tax time. If your withholding exceeds your tax bill then you get a refund – money you can spend or save for the future.
Change in Marital Status
Over the years, you may remain single, get married, divorced, get married again, or be widowed. In any case, your filing status has a huge impact on your taxes. There are different requirements for every status as defined by the IRS, each with its own particular set of benefits, limitations, and tax concerns:
Whenever your marital status changes, you will want to take into consideration the withholding filing status you are claiming on your Form W-4. For example, an unmarried person with no children or dependents will use a Single filing status to determine withholdings, whereas a married person will use the Married filing jointly filing status. Before updating your marital status, you should fully investigate the tax repercussions that may result.
Starting a New Job
Congratulations! You are either entering employment for the first time or have moved on to a new opportunity, and, as stated above, will fill out a Form W-4 to determine how much of your pay your employer will withhold. With the major changes in how withholding is calculated, using an old W-4 as a guideline isn’t helpful.
However, do not be intimidated by the Form W-4 – it comes with worksheets that will help you figure out your withholding. Do not confuse the Form W-4 with the Form W-2. The W-4 is for your employer’s use in calculating your tax withholding. The W-2 is the IRS form used to report your income and withholding to IRS, Social Security Administration, and the state(s) you lived and worked in. It is also used by you to report income and withholding on your tax return.
Becoming a Parent
Having a child – or adopting one – is a momentous occasion. And it changes absolutely everything in your life, not the least of which is your approach to money, savings, and withholding taxes.
When updating your Form W-4 to reflect the new addition to your family, your new withholding will change considering you can now have a dependent and are most likely eligible for the Child Tax Credit, if your income is less than $200,000 ($400,000 if filing jointly) and the child is your dependent. Every situation is unique, so you and your spouse/partner will want to make sure you are on the same page as to who is claiming the child as a dependent since only one parent can claim the dependent-related tax credits. Again, every family’s circumstance is different, so you should think seriously about this before making a decision regarding your W-4 completion.
If you adopt your child, not only are you eligible for the Child Tax Credit, or the Credit for Other Dependent if your child is 17 or older, but you may be eligible for the Adoption Credit. An eligible child for the adoption credit includes special needs children. A qualifying special needs child is determined by the state and local family welfare organizations. The credit isn’t available for adoption of your spouse’s children or your child born to a surrogate parent.
When You Move or Change Residence
When changing residence, it is vitally important that you alert the IRS by filing IRS Form 8822, Change of Address. Be sure and update your address with your employer also, so that all of your tax documents will have the same information. If you are relocating to a new state, you should learn beforehand how taxes work in your new home state so you can be prepared when it is time to file your return.
However, if you are changing not only your address but your status as a renter to a homeowner, there are a large number of tax consequences – including updating your Form W-4. Adjusting your W-4 for your new tax status as a homeowner can be a simple procedure, but takes a great deal of calculation and consideration beforehand. First, you will have to determine your home mortgage interest and property taxes will be for the year. Then, look at your other itemized deductions, such as charitable contributions and medical expenses. If the total deductible amount of expenses is greater than your standard deduction amount, complete the appropriate W-4 worksheet.
To this end, you will want to keep your closing statement from the purchase of your home and receipts for any home improvement costs - organized for your own easy access and understanding. These expenses will be used when you sell the house.
With the ever-changing IRS rules involving credits and deductions, you may want to consult a qualified Tax Pro before making any changes that affect you or your tax status. It’s much better to do everything fully informed and by the book than to make a mistake and regret it later, especially where your new home and taxes are concerned.
Happy Birthday! If you’ve turned 65 or are about to hit this magic age, withholding considerations could still apply to you. At this time of your life you generally have retirement income and may still be working and investing in an IRA for 5 ½ more years. Retirement income from a 401k or IRA is not required to have withholding, however, you can withhold taxes from the distribution. Or if you’re working you can adjust your W-4 with your employer so the taxes withheld from your pay covers your retirement and investments. Likewise, if you’re collecting Social Security benefits you can change your withholding from your job or you can have taxes withheld from your benefits.