As we reach the midpoint of the year, it’s a great time for employers to encourage their employees to perform a financial health check-up. Ensuring the accuracy of your pay is essential for maintaining financial stability and compliance with tax laws. One critical aspect of this is managing your tax withholdings, which are based on the elections you make as an employee. The Internal Revenue Service (IRS) recommends regular reviews and adjustments to your federal and state tax withholdings, especially if certain life or financial changes occur.
Key Changes That Might Require a Withholding Adjustment
1. Lifestyle Changes
- Marriage or Divorce: Changes in marital status can significantly impact your tax situation.
- Birth or Adoption of a Child: New dependents can alter your withholding needs.
- Home Purchase: Owning a home may affect your itemized deductions.
- Retirement: Transitioning to retirement changes your income sources and potentially your tax bracket.
- Filing Chapter 11 Bankruptcy: This can have complex tax implications.
2. Wage Income Changes
- Starting or Stopping a Job: Any change in employment status for you or your spouse can necessitate a review.
- Second Job: Holding multiple jobs requires careful withholding calculations to avoid underpayment or overpayment.
3. Changes Related to Taxable Income
- Interest and Dividends: Additional income from investments can affect your tax liability.
- Capital Gains: Profits from selling assets like stocks or property need to be accounted for.
- Self-Employment and Gig Economy Income: These income types are not subject to automatic withholding.
- IRA Distributions: Certain Roth IRA distributions and other retirement account withdrawals might impact your taxable income.
4. Itemized Deductions or Tax Credit Changes
- Medical Expenses: High medical costs can lead to adjustments in deductions.
- Taxes and Interest Expense: Changes in property taxes or mortgage interest can affect your deductions.
- Gifts to Charity: Charitable donations can influence your taxable income.
- Dependent Care Expenses: Costs related to dependent care might qualify for credits or deductions.
- Education Credit: Expenses for higher education can provide tax credits.
- Child Tax Credit and Earned Income Tax Credit: Changes in eligibility for these credits should prompt a review.
How to Adjust Your Withholdings
The amount of tax your employer withholds from your paycheck is determined by your W-4 form. These withholdings count towards your annual income tax bill, which you settle when filing your tax return each April. To ensure you’re withholding the correct amount:
1. Use the IRS’s Withholding Calculator: This tool helps determine the appropriate amount to withhold based on your current situation.
2. Update Your W-4 Form: Follow the instructions provided in this guide. This will ensure your withholdings are accurate.
3. Contact Your Tilson Service Team: If you have any questions or need further assistance, our team is ready to help.
4. View this resource for additional information regarding reasons why an employee may want to review and/or adjust their tax withholding settings.
Important Considerations
This information is provided as a courtesy to help you manage your tax withholdings effectively. It is not intended to be exhaustive nor should it be construed as legal advice. Tilson does not assume liability for any employee’s tax situation. All withholdings are processed based on the information provided by the employee through the Federal W-4 or the State W-4 equivalent.
Regularly reviewing and updating your tax withholdings is a best practice that can help you avoid surprises at tax time and ensure your financial health. Take advantage of this mid-year check-up to stay informed and proactive in managing your finances!
