Tax Withholdings and Your W-4

Tax Planning

Did you get a large refund this past April? More than $1000? 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, it all starts with your payroll department. It’s not too tough once you understand, and it’s better that you should control your money than to lend it interest free to Uncle Sam. On the other hand, if you owed too much, you run the risk of penalties, and having trouble paying your bill in April.

The first step to adjusting your withholdings is to get a copy of your W-4 form. You should also have your most recent pay stub, last tax return, as well as last year’s W-2. The form itself is pretty brief, it will take into account whether you itemize or take the standard deduction. The form also considers your dependents an whether you expect to have any interest or dividend income. Last, it takes into account whether you are filing jointly with your spouse. These calculations are all done to arrive at a single number, your withholding allowance.

There are a number of situations that would prompt you to want to review and possibly adjust your withholding.

Marriage or divorce is a major tax-changing event, and once you’d done either, it’s time to look at how your taxes would be impacted. 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) with have just over $11,000 in 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, then this $15,000 will translate to 4 additional allowances on your W-4. For purposes of this form, a dependent’s exemption of $3,700 (in 2011) or any itemized deductions for the same $3,700 are equivalent, one withholding allowance having the same effect as an exemption. It’s your way of telling your payroll department, “Don’t tax me on that $3,700 worth of income.” For a couple in the 25% bracket, the example above will help them increase their take-home pay by just over $300 per month. But only if they adjusted their withholdings!

Is this the right time for you to review your withholdings?

Comments (1) Leave your comment

  1. My husband is a non resident alien his w4 status is single.he will become a resident alien for 2014 in June according to substantial presense test.can he change his married status on w4 after that? And can he claim withholding without me having an it in?should spouse have itin for changing status in w4 and to claim withholding?

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