It is definitely, unsettling to owe a significant amount in taxes when you're used to a refund. Your situation, with a move to a higher cost of living state and an increased salary, points to some common reasons why your tax liability might have changed.
Here are some reasons to explain what may have happened and how you can adjust your W-4 to potentially decrease the taxes you owe next year:
Why You Might Owe Taxes
- Increased Income: Even with a higher cost of living, a salary increase can push you into a higher tax bracket, meaning a larger percentage of your income is subject to tax.
- State Income Tax Differences: When you moved, you likely moved to a state with a different (and possibly higher) state income tax rate. If your previous state had no or very low income tax, or a lower tax rate, you'd feel the difference. Even if your old state had income tax, the new state's rules, deductions, or credits might be different, leading to a higher overall tax burden.
- Owing due to less withholding percentage: Owing taxes indicates that the standard amount of tax withheld based on your filing status and other information you provide through your W4 is not enough based on your specific situation. When your income significantly increases, or your new state has higher taxes, the "standard" withholding often may not be enough to cover your actual tax liability.
- Standard Deduction vs. Itemized Deductions: As a single individual with no dependents, you are likely to take the standard deduction. While the standard deduction is substantial, it might not fully offset your increased income if your overall tax burden has risen due to your higher salary and state taxes.
How to Adjust Your W-4 to Decrease Taxes Owed Next Year
The goal of adjusting your W-4 is to have your employer withhold closer to your actual tax liability throughout the year, rather than under-withholding and owing a large sum at tax time. Here's what you can do:
- Use the IRS Tax Withholding Estimator: This is the most crucial step. The IRS provides a free, online Tax Withholding Estimator that takes into account your specific financial situation (salary, filing status, deductions, other income, and even past tax return information) to help you determine the most accurate withholding.
- What you'll need: Your most recent pay stub, your last year's tax return, and an estimate of any other income you expect for the current year.
- The estimator will guide you through questions about your income, deductions, and credits, and then recommend how to fill out a new W-4.
- Submit a New Form W-4 to Your Employer: Once you've used the IRS estimator, it will provide instructions on how to fill out a new Form W-4. You'll then give this updated form to your employer's payroll department. They will adjust your tax withholding based on the new information.
Here are the key sections on the W-4 that you'll focus on as a single filer with no dependents:
- Step 1: Personal Information: Ensure your name, Social Security number, address, and "Single" filing status are correct.
- Step 2: Multiple Jobs (Not Applicable for You): Since you only have one job and no spouse, you'll likely leave this blank.
- Step 3: Claim Dependents (Not Applicable for You): Since you have no dependents, you'll leave this blank.
- Step 4: Other Adjustments: This is where you can make critical changes:
- 4(a) Other Income: If you have any other income not from jobs (e.g., interest, dividends, freelance income) that isn't subject to withholding, you can enter it here so your employer withholds more to cover taxes on that income.
- 4(b) Deductions: While you likely take the standard deduction, if you have significant itemized deductions that exceed the standard deduction (e.g., large mortgage interest, state and local taxes beyond the SALT cap, significant medical expenses), you can use the "Deductions Worksheet" on the W-4 instructions to estimate these and include them here. This would decrease your withholding. However, if your goal is to owe less at tax time, you'll likely want to ensure enough is being withheld, so this section might not be your primary focus for increasing withholding.
- 4(c) Extra Withholding: This is the most direct way to increase the amount of tax withheld from each paycheck. If the IRS estimator suggests a higher withholding amount, or you simply want to ensure you don't owe next year, you can enter an additional dollar amount you want withheld from each paycheck. For example, if you owed $3000 and want to avoid owing next year, you could divide $3000 by the number of pay periods you have left in the year and add that amount to line 4(c) on your W-4.
- Review Throughout the Year: I recommend to review your withholding quarterly, or whenever you experience significant life changes (like another salary increase, getting a second job, or new deductions).
By checking your withholdings often and adjusting your W-4, you can ensure that the correct amount of tax is withheld from your paychecks throughout the year, helping you avoid a surprise tax bill next spring and potentially even getting a refund.
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Terri Lynn
