Did you get a large refund this past April? More than $1,000? Or perhaps you owed money and had to write a check you didn’t want to write? It may be time to sit down, sip your beverage, and learn a bit about how to adjust your tax withholdings.
Withholdings are the taxes your employer takes from your pay each check, and it all starts with your payroll department. It’s not too tough once you understand, and it’s better that you control your money.
The first step to adjusting your withholdings is to go to the TurboTax W-4 withholding calculator to help you estimate your personal withholding allowances. All you need to do is enter info about you, your dependents, paycheck and additional income info. The TurboTax W-4 withholding calculator will also take into account home ownership, charitable donations and retirement contributions since those all help your tax situation and can increase the amount of allowances you can take. Once you answer simple questions, you can estimate the number of withholding allowances to claim on your W-4, whether you want more money in your paycheck or a bigger tax refund. Once you are done you can print a blank W-4 to fill out and give to your employer or payroll provider.
There are a number of situations that would prompt you to want to review and possibly adjust your withholding:
When you experience life changes it’s time to look at how your taxes would be impacted. Marriage or divorce can change your tax situation and is a good reason to adjust your W-4. The addition of a dependent, by birth, adoption, or an elderly parent moving in and getting more than 50% of their support from you will qualify as an extra exemption. This last example is easy, and shows how one additional withholding allowance on the W-4 represents one more personal exemption on your tax return. On a side note – these life changing events should also trigger a review of your beneficiaries on any and all of your retirement accounts.
The purchase of a new home is likely to have the largest impact on your withholding. A $250,000 mortgage (at 4.5% 30yr fixed) will have just over $11,000 in tax deductible interest the first full year. Add another $4,000 for property tax. If your state income tax already put you at or near the standard deduction amount, then this $15,000 will translate to additional allowances on your W-4.
Having a side gig and a W-2 job may be reason to lower your withholding allowance for your W-2 job so you can pay in more taxes to offset taxes that are not withheld from your self-employment income.
If you experienced income or life changes, don’t worry: TurboTax has you covered. TurboTax will ask you simple questions and give you the tax deductions and credits you are eligible for based on your answers.