How to Adjust Your Withholding on Your W-4 Form
While some taxpayers may look forward to their refund, others prefer to make sure their taxes are covered throughout the year by increasing their withholding amount. If you want to adjust the amount you withhold, it’s time to update your W-4 Form.
What to Consider
The IRS updated the W-4 Form in 2020, after the Tax Cuts and Jobs Act suspended personal exemptions, among other changes. This updated form does not ask for a number of allowances; rather, it asks how many dependents you can claim. It also asks whether you wish to increase or decrease your withholding amount based on certain factors, like a second job or your eligibility for itemized deductions.
Before making any updates, it’s wise to first see if anything has changed since the last time you completed your W-4. For example, if you have a child who turns 18 this year, you may need to update the form. If you file as head of household, you may want to file a new form, so your withholdings align with your tax liability.
Other factors to consider include a change in your marital status, whether you took a pay cut or got a raise, did not work the whole year, have significant dividend income, or have income from a consulting or a freelance gig.
How to Fill in the W-4
You will also need to accurately list all your non-work taxable income streams. This includes capital gains, interest and dividends from investments, and rental properties. You can update this on line 4(a) of the W-4.
When you fill out a W-4, the IRS assumes, by default, that you are taking the standard deduction when you file. If you itemize, you should consider estimating your deductions and updating the number on line 4(b).
Finally, if you do consult or do any freelance work on the side, you may want to withhold a set amount that will cover these taxes. You can put that amount on line 4(c).
When to Update the W-4
Remember, you can change your W-4 at any time. Try updating your form and then reviewing your next few paychecks to see how much your employer is withholding. Then, if you need to, you can update your W-4 and re-submit it to your employer.
To help make this process more transparent, the IRS has a tax withholding calculator you can use before submitting your updated W-4 Form.
Bottom Line
If you haven’t looked at your W-4 Form since the IRS updated it, or if you’ve gone through some major life events, reviewing the form and adjusting your withholdings may help you cover your tax bill for the year.
At Savant, we offer individuals and families tax preparation services as part of an integrated and holistic approach to wealth management. If you’d like a second opinion on your portfolio or tax preparation, we invite you to schedule an introductory call with a member of our advisory team.