Withholding is the amount of income tax your employer pays on your behalf from your paycheck. The changes to the tax law could affect your withholding. Show
How to Check Your WithholdingUse the IRS Withholding Estimator to estimate your income tax and compare it with your current withholding. You’ll need your most recent pay stubs and income tax return. The results from the calculator can help you figure out if you need to fill out a new Form W-4 for your employer. Or, the results may point out that you need to make an estimated tax payment to the IRS before the end of the year. If you adjusted your withholding part way through 2021, the IRS recommends that you check your withholding amounts again. Do so in early 2022, before filing your federal tax return, to ensure the right amount is being withheld. Find Your Adjusted Gross Income (AGI)If you're changing your tax withholding, you'll need to know your adjusted gross income (AGI). You can find your AGI number on your prior year’s tax return. If you don’t have a copy of last year’s tax return, you can get it from a tax return transcript. Top Updated for Tax Year 2022 • October 18, 2022 09:34 AM OVERVIEW Common lifestyle changes, like getting a job or getting married, can change your tax liability. To avoid being caught off guard by an unexpected tax bill or a huge tax refund, you'll need to adjust your withholdings on your paycheck. For information on the third coronavirus relief package, please visit our “American Rescue Plan: What Does it Mean for You and a Third Stimulus Check” blog post. What's a W-4 and why should I pay attention to it?Every time you earn income, you'll most likely owe income taxes. How much your employer sets aside to pay federal taxes on your behalf is determined by the information you submit on your Form W-4. When you have too much money withheld from your paychecks, you end up giving Uncle Sam an interest-free loan (and getting a tax refund). On the other hand, having too little withheld from your paychecks could mean an unexpected tax bill or even a penalty for underpayment. The key to paying the right amount of tax is to update your W-4 regularly.
Some life events result in more taxes, while others entitle you to credits and deductions that lower your taxes. The list of these events is long, but here are 5 of the most common reasons to revisit your W-4 withholding. 1. You get a second jobGetting a second job is the most common reason for needing to adjust your W-4. Do this whether you moonlight, have a home business or get another full-time job. Any time your income goes up, your tax liability will likely go up too, requiring a new W-4. If your extra income comes from a side job that doesn’t have any tax withholding, you could submit a new W-4 to adjust the withholdings at your main job to account for the increase in income. 2. Your spouse gets a job or changes jobsAny change of household income, whether up or down, could put joint filers in a different tax bracket and require both of you to modify your withholdings. To ensure accuracy, use your combined income to figure out the appropriate withholding. Use TurboTax's W-4 Withholding Calculator to determine the amount of withholding you should state on you and your spouse's W-4s. 3. You’re unemployed part of the yearIf you get laid off from your job and stay unemployed the rest of the year, you likely had too much tax withheld while you were working. So, if you get rehired in the same year, you'll need to adjust for the downtime. To avoid paying too much tax, you should adjust your withholding on a new W-4. We'll show you how to do that below. 4. You get married…or divorcedTying or untying the knot will most likely change your tax rate, especially if both spouses work. Married persons filing jointly qualify for a lower tax rate and other deductions than filing as single. Getting a divorce can take you back to single or head of household status and reverse many tax benefits. If you fail to account for these events on your W-4, your withholdings could be inaccurate. 5. You have a baby…or adopt oneA new baby is more than a bundle of joy. It's can be a major tax event, too. If you are eligible for the Child Tax Credit, you can include the amount that you will qualify for in your W-4 calculations. Just remember that any amount that you receive as an advance payment during the year will need to be subtracted from the credit that you expect to receive on your tax return since you would have already received this money If you adopt a child, there's potentially another tax credit. Any of these could allow you to reduce your withholding to account for the added tax benefits. For tax year 2021, the Child Tax Credit changed for to provide help for families financially struggling due to the pandemic. The American Rescue Plan raised the maximum
Child Tax Credit in 2021 to $3,600 for qualifying children under the age of 6 and to $3,000 per child for qualifying children ages 6 through 17. Before 2021, the credit was worth up to $2,000 per eligible child, and those 17 years old and up were not eligible for the credit. The Child Tax Credit changes for 2021 have lower income limits than the original Child Tax Credit. Families that do not qualify for the credit using the revised income limits are still eligible for the $2,000 per-child
credit using the original Child Tax Credit income and phase-out amounts. In addition, the entire credit is fully refundable for 2021. This means that eligible families can get it, even if they owe no federal income tax. The Child Tax Credit has been expanded by the American Rescue
Plan Act, that was enacted in March of 2021. Part of this expansion is to advance the 2021 tax credit to families by sending them direct payments during 2021 rather than having them wait until they prepare their 2021 taxes in 2022. Most families do not need to do anything to get their advance payment. Normally, the IRS will calculate the payment amount based on your 2020 tax return. Eligible families will receive advance payments, either by direct deposit or check. The amount that you
receive will be reconciled to the amount that you are eligible for when you prepare your 2021. Most families will receive about one-half of their tax credit through the advance payments. If you receive too little, you will be due an additional amount on your tax return. In the unlikely event that you receive too much, you might have to pay the excess back, depending on your income level. For updates and more information, please visit our 2021 Child Tax Credit blog post. How to adjust your W-4 withholdingThe IRS replaced the old W-4 format with a new system beginning in 2020. The new W-4 is an attempt to be more accurate in estimating your tax withholding so that you can get closer to owing $0 and getting a $0 refund when you prepare your tax return. The new W-4 system:
It's easy to adjust your withholding. You can do it on paper or electronically. The old-fashioned way is to walk through the worksheets on the W-4 form. An even easier way is to use the TurboTax W-4 Calculator. This simple tool makes determining your withholdings easy. Just answer the questions and the withholding amount is computed for you.
You can adjust your W-4 at any time during the year. Just remember, adjustments made later in the year will have less impact on your taxes for that year. Remember, with TurboTax, we'll ask you simple questions about your life and help you fill out all the right tax forms. With TurboTax you can be confident your taxes are done right, from simple to complex tax returns, no matter what your situation. All you need to know is yourselfAnswer simple questions about your life and TurboTax Free Edition will take care of the rest. For simple tax returns only Real tax experts on demand with TurboTax Live BasicGet unlimited advice and an expert final review. Done right, guaranteed. For simple tax returns only
The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business. |