As the leaves are changing and temperatures are turning cooler, the ghouls and goblins are right around the corner rap, tap, tapping at your front door. Although “Tax Day” may be the furthest thing from your mind, right now is a good time to check your 2016 withholding and avoid the “BOO!” that could be haunting you when you file your tax return next year.
Typically, an ideal strategy is to match the amount paid in taxes during the year to the amount actually owed. If you have too little money withheld for taxes and multiple allowances, a potentially large tax bill may be looming. If too much is withheld, you may not be maximizing your cash flow to its fullest potential. Each year, millions of working Americans have an overabundance of taxes withheld from their paycheck, far more than is required, resulting in large refunds. Although the government established this system of payroll withholding, the good news is that you have some control over your federal deductions.
Generally, Social Security and Medicare tax rates are a fixed percentage up to a certain income level, but adjusting your take-home pay can happen based on information you provide on your FORM W-4. To minimize the tax withholding guessing game, theIRS offers one of several options for a free IRS Withholding Calculator that helps you estimate your paycheck withholdings.
It could also be worthwhile to adjust your withholding if certain life events occur throughout the calendar year. The list of events is long, but 4 common life changes that may impact your taxes are:
- Tying (or untying) the knot – If you are legally married between now and December 31st, you are considered married for the entire year and changes your filing status to either married filing jointly or married filing separately. Married filing jointly often results in additional deductions and a lower tax rate. A marriage “bonus” could apply when combining unequal salaries on a joint return and potentially pulling higher income into a lower bracket. As its counterpart, untying the know requires joint filers to return to single status and possibly reverses some of the married tax benefits.
- Buying a house – For most people, buying a house and the associated expenses are the biggest line items on a personal balance sheet. Luckily, some of the biggest tax breaks from home ownership comes from deducting mortgage interest and other home related expenses. Through itemizing on a tax return, home owners are able to claim deductions for interest, property taxes, mortgage insurance premiums, and qualifying home improvements.
- New addition to the family – Game changing life events like having a baby or adopting a child offer additional allowances right along with the new bundle of joy. Additional eligible allowances such as the Child Tax Credit or dependent credit result in tax deductions come Tax Day. If the deduction is deferred to the following year, a larger tax refund may be inevitable.
- A second job – Lastly, adding another place of employment to your bank account is the most common reason for adjusting the W-4. Whether you own a home business on the side, moonlight at a local restaurant, or get a second full-time job, more income results in more tax responsibility because tax tiers are based on the amount of total income. Adjusting withholding to accommodate for the additional income and maximizing your deductions will help avoid surprises in April.
As a reminder, changing your withholding can be done at any time during the year and as many times as needed. The earlier in the year, the more impact on your outcome.
By Susan Amsler
October 10, 2016
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