7 Reasons to File a New Tax Withholding Form
Some financial tasks can be taken care of when life slows down, and when you can give financial matters full attention. Filing a new tax withholding form or W-4 Form, however, is not one of them.
The best time to file a new tax withholding form with your employer is precisely when your life is in upheaval -- you're getting married or divorced, buying a house and moving into it, or even bringing a new baby home from the hospital. The bigger the change in your life, the more important it is to make sure you're having the right amount of income tax withheld from your pay.
If you experienced any of these events in your life recently, it may be time for you to check your withholding levels and file a new Form W-4, if necessary:
You get married. Getting married changes your tax status -- even if you don't file a joint return. If one spouse makes most of the money, or if one spouse doesn't work, your total tax between the two of you may go down. In that case, you'll probably want to file Form W-4 as married, so your employer withholds less income tax.
Watch out -- if you both work and earn similar amounts, your total tax may stay the same or even be higher. You may need to select married, but withhold at higher single rate on your Form W-4.
You may also want to claim a withholding allowance for your spouse to have the right amount of tax withheld.
You get divorced. The end of a marriage can totally upend your tax situation. You're filing on your own now. You may or may not be claiming the kids as dependents on your return, or taking a credit based on them or their expenses. You may pay alimony, which is deductible, or child support, which isn't. When you get a divorce, be sure to re-evaluate your tax situation for your new situation.
You bring home a baby. The IRS suggests that you claim one withholding allowance on your tax withholding form for each dependent, such as a new baby, adopted child, or even a parent you support, or any other qualifying individual.
The number of allowances you should claim is not always the same as the number of people living in your house. You may want to take more allowances if you also can take the Credit for Child and Dependent Care Expenses, the Child Tax Credit, or if this child qualifies you to use the Head of Household filing status. The right number of allowances is the number that causes you to have the right amount of income tax withheld -- regardless of how many dependents you have.
You buy a house. Welcome to the home mortgage interest deduction! Between that and the deduction for property taxes, buying a home can make a big difference on your tax bill. You might as well get the benefit of those tax breaks all year, by adjusting your withholding allowances. Remember, more allowances cause you to have less withheld.
You or your spouse changes jobs. When you get a new job, you'll fill out a new Form W-4 right away. But did you think to change your own tax withholding when your spouse got a new job, was laid off, or changed to a job that pays more or less than the old one?
Your spouse's income affects your tax situation. When his or her income rises, you may be in a higher tax bracket. You may want to claim fewer withholding allowances and have more tax withheld. If your spouse's income goes down, or if he or she stops earning an income, you may need to claim fewer allowances so you have less income tax withheld - and keep a little more of your pay in every check.
You have significant investment income. Having a banner year as an investor? That's great, but don't get hit with a big tax bill -- and possibly interest and penalties -- at the end of the year. You could send an estimated tax payment to the IRS to avoid that possibility. Or you could take the easy route. Have a little more taken out of your paycheck from now to the end of the year, instead, by filing a new tax withholding form.
Any other event that affects your final tax bill. Don't leave your income tax withholding to chance, and don't think you have to use exactly the number of allowances from the IRS worksheet. The worksheet is only a guide. Choose the right withholding status and number of allowances to have the right amount of income tax withheld.
Be smart about your taxes
Staying aware of when you should file a new tax withholding form is just one element of keeping your taxes as low as possible. In our brand-new special report "How You Can Fight Back Against Higher Taxes," The Motley Fool's tax experts run through what to watch out for in doing your tax planning this year. With its concrete advice on how to cut taxes for decades to come, you won't want to miss out. Click here to get your copy today -- it's absolutely free.
The article 7 Reasons to File a New Tax Withholding Form originally appeared on Fool.com.
Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright © 1995 - 2014 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.