Many taxpayers goal is to withhold enough to match your tax liability, avoiding both a large tax bill and overpaying, which effectively gives the government an interest-free loan.
Key Steps to Adjust Withholdings
To ensure you do not owe money each year:
- Understand Your Tax Situation
- Combined Income and Filing Status: The first step to understand the Form W-4 amounts you will need to combine all income for the year (e.g. W2 income, Dividends, Capital Gains, 1099 income, etc.) and confirm Filing status (e.g. Single, Head of Household)
- Deductions and Credits: Account for eligible deductions (e.g. mortgage interest, charitable contributions) and credits (e.g. Child Tax Credit) that reduce taxable income.
- Use the TurboTax Tax Withholding Estimator.
- Complete and Update Form W-4
- Submit New Form to include a Multiple Jobs Worksheet, if needed: If work two jobs, use the Multiple Jobs Worksheet to coordinate withholdings. This prevents under-withholding, which can lead to a tax bill. For example, if both jobs are similar amounts, check the box on Line 2c of Form W-4 to indicate this, ensuring proper withholding.
- Additional Withholding: Use Line 4c on Form W-4 to request extra withholding if you anticipate owing more due to non-wage income or other factors. This can help cover potential shortfalls.
- Review and Adjust Periodically
- Annual Review: Check withholdings at least once a year, especially after major life events. The IRS recommends a "Paycheck Checkup" to ensure withholdings align with your tax liability.
- Monitor Paystubs: Regularly review paystubs to confirm correct amount is being withheld.
Additional Resources
- IRS Publication 505: Provides detailed worksheets and examples for tax withholdings and estimated tax.
- Form W-4 with Instructions plus Multiple Jobs Worksheet.
Have an amazing day! Zachary W (CPA 9+ years)
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