Throughout the upcoming year, you may get married. You may buy or sell a home, or you may adopt or have a new child. You may start to make retirement contributions for the first time, or you may start paying student loans after graduating from college. You or your spouse may start or stop work, or start a second job on the side.
These will be significant personal events for you, but what you may not consider at the time is that they could also have a substantial impact on your taxes for the year. At the end of the year, you may be due a larger refund than you expected, or you could owe more than you anticipated.
Unexpectedly owing more money for taxes can be a blow to your personal finances. A larger refund can be a pleasant surprise, but those funds are withheld from you throughout the year, instead of earning money in an interest bearing account.
Luckily, there’s a way to adjust the amount withheld for your taxes, as soon as a tax-related event occurs.
When you started your most recent job, you had to fill out a Form W-4 with your employer. This form establishes the amount of taxes withheld from your paycheck, calculated from your responses to tax questions. The more allowances you claim, the less is withheld for taxes.
You should fill out a new W-4 form if you get married or divorced, if your spouse experiences a job loss or starts a new job, or if the number of your dependents change, either due to a new addition to your family or a dependent who will exceed the age limit during the tax year and can no longer be claimed. You may also be newly eligible or ineligible for the child tax credit or the child and dependent care credit. These events change the number of allowances you claim, and affect the amount withheld.
If you purchase a home, you may begin to itemize your deductions instead of taking the standard deduction. The mortgage interest you pay throughout the year, combined with your other itemized deductions, may exceed the standard deduction, prompting you to lower your tax bill by itemizing. In this case, you’ll want to calculate your estimated deductions for a given tax year and enter that amount on the Deductions and Adjustments worksheet attached to a new Form W-4. This worksheet will help you adjust your total number of allowances, in order to arrive at a more accurate amount for withholding.
The Deductions and Adjustments worksheet also can be used for adjustments to income, the deductions that you can claim whether or not you itemize. Traditional IRA contributions, Health Savings Account contributions and student loan interest fall into this category.
If you owe a very large amount or receive a very large refund this year, and your income, deductions, adjustments and credits remain similar to last year, it may be worthwhile to take another look at your W-4 form, and adjust accordingly.
Throughout the upcoming year, revise your W-4 form as you experience these tax-related events. Your withheld amount will be closer to the actual amount of taxes you owe, and with that stability, you can make more effective plans for your personal finances.
Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 19 years experience in retail banking and with financial institutions in Guam and Hawaii. You can email him at firstname.lastname@example.org.