Death and taxes. The two things that we cannot avoid. Any time you earn income, you are likely to owe tax on it. How much tax is levied before the remainder of the income makes it into your paycheck is based on how you fill out your Form W-4.
Your W-4 can be updated at any time during the year, but it is likely you will not need to make changes unless one of the following events occurred:
- You took a second job
- You received a large pay increase
- You experienced a period of unemployment throughout the year
- You got married or divorced
- You had a child or adopted one
If any of the above apply to you, it may be worth looking into an adjustment. Your answers on the Form W-4 cause the amount being withheld to increase or decrease depending on how you respond.
If you have too much withheld from your paycheck, you will receive it all back in the form of a tax refund; but that money may have been more useful to you throughout the year. Additionally, delays in return processing times at the IRS mean that your refund could be held up for months or even years as some people have recently found out. In that case, it is easier to have less withheld from your paycheck throughout the year.
If you have too little withheld, you will end up owing the IRS come tax time and will have to write a check. This can be an aggravating experience and one that can be avoided if you fill out your W-4 in a way that results in more money being withheld. You can even specify an additional dollar amount to be withheld above and beyond the amount withheld based on filing status.
To help you determine how recent changes may affect your withholding, the IRS has provided an estimator tool for assistance. Click here to access the Tax Withholding Estimator and/or visit https://www.irs.gov for more information.
If you have further questions regarding Form W-4, or for additional information regarding tax planning, please contact your Hefren-Tillotson financial advisor today.