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How does my W-4 form impact whether or not I receive a tax refund?

Employers are required to withhold income taxes from each paycheck, and your W-4 form provides instructions to your employer on how much you would like withheld for your income taxes. The IRS requires employers to have new employees complete a W-4 form. The W-4 form may also go to your state’s taxing authority if you live in a state that collects income tax.

You can receive a refund when you file your tax return if more tax has been withheld from your income than you owe. If you still owe income taxes at tax filing time, even after withholding taxes all year, you may want to review your W-4 withholding selections to see if you are withholding enough from each paycheck. If you don’t withhold enough taxes from your paychecks, you may end up owing money at tax time. 

You can update your W-4 form at any time throughout the year. If you take a second job, get married, divorced, or have a baby, it may be a good idea to revisit your withholdings. Life changes such as these can have a major impact on your tax bracket, credits, deductions, and more. In addition to updating your form, the IRS also allows you to submit a new W-4 form. You may want to submit a new form if you want to increase the amount withheld from your paycheck due to concerns that you will owe money at the end of the year.

Please note that if all your income comes from self-employment, you won’t fill out a W-4 form. Self-employment requires individuals to make estimated state and federal income tax payments four times a year instead. Like withholdings, however, if your estimated tax payments end up being more than your overall tax liability, you may be eligible for a tax refund at the end of the year.

What steps do I take to fill out my W-4 form?

The W-4 form contains only a handful of steps you need to review and then complete if the step applies to you and your situation. Filling it out generally involves claiming your dependents or instructing your employer to withhold a different amount. While the IRS provides instructions, those instructions can often leave individuals with additional questions. The following information can be helpful when you are filling out your W-4.

Your Information

When you complete the appropriate steps on your W-4, you are giving your employer information that will help them determine how to withhold your income taxes. Before filling out your form, consider the following:

  • Will you work more than one job?
  • Do you expect to receive unearned income (or income from other sources-see “Other withholdings,” below)?
  • Do you plan to file a joint tax return with your spouse, if you are married?
  • Do you have dependents (see “Dependents,” below)? 

Some taxpayers can be exempt from withholding, meaning they can skip having taxes withheld from their paychecks, if they meet strict qualifications. For example, the IRS allows taxpayers who did not have federal tax liability last year and who expect to have no federal tax liability this year to claim themselves exempt from withholding.

Dependents

If you are the parent of a minor, or a college student that you support, you can indicate this on your W-4 form. The IRS considers children dependents if the person claiming them provides more than 50% of their support. Notably, elderly parents can also be claimed as dependents if certain qualifications are met. 

If you are in college, living with your parents, or both, and plan to file taxes, be sure to check with them to see if they plan to claim you as a dependent on their tax return. 

Another common situation that can cause confusion comes up between separated or divorced parents of minor and college-aged children. Only one parent can claim a child as a dependent when parents do not file jointly. Separated or divorced parents may want to discuss who claims a dependent and other credits before filing their tax returns since the IRS can reject both returns.

If you are claiming dependents yourself, make sure that you understand the tax credits that may be available to you. For example, you could receive the child tax credit for every dependent you support who is 16 years old or younger.

Withholdings for more than one employer

Working multiple part-time jobs or a full-time job plus a part-time job can complicate your withholding amount. The reason for this is that tax withholding occurs based on the job, not the employee. Part-time jobs often have an income threshold low enough that the employer withholds little to no state and federal income taxes. To compensate for this, you can request that one or all of your employers increase the withholding amount by indicating an additional amount you would like to withhold on your W-4 form.

If you are married and both you and your spouse work, you may also need to include an additional withholding amount to avoid paying too little taxes throughout the year. The W-4 form has a section titled Multiple Jobs Worksheet that you can find on the second page of the instructions.

Other withholdings

Investment income, self-employment income, selling a car or home, and gambling winnings are all examples of income that you didn’t earn at a traditional job. The worksheet attached to the W-4 form walks you through how to determine any additional amount of taxes you may want withheld.

Confusion often arises around the topic of receiving non-wage income in the form of private sales. This is especially true for individuals who may sell items they make online or at craft fairs. If you know that this type of income is certain, you may want to consider adjusting your withholding from your employer to offset that other taxable income to help you keep your monthly finances in order. See the Self-Employment section of the W-4 Instructions page.

How do I know if my tax withholding is correct?

Getting your tax withholding just right can be a balancing act. Withholding too little can leave you with an unpleasant tax bill in April. On the other hand, having too much withheld from your paycheck is like giving the IRS an interest-free loan.

While everyone’s tax situation is unique, here are three basic tips to help you figure out whether to adjust your withholding:

Increase your withholding if you owe taxes

If you owe state or federal income tax after preparing and filing your tax return, consider updating your W-4 form to direct your employer to increase your withholding amount going forward. Remember, you can adjust your W-4 form at any time during the calendar year.

Decrease your withholding if your tax refund is large

Although receiving a large tax refund is nice, consider that you could have been using some of that money yourself over the last tax year. You can invest or save to earn interest, instead of allowing the government to hold onto the money you overpaid in taxes.

Talk to your tax professional after major life changes or events

Income tax withholding can be a complex and frustrating thing to figure out on your own. A financial professional, such as an accountant or CPA, can help you figure out the most appropriate withholding amount to get you as close to the break-even point as possible. Working with a professional can be especially beneficial in these circumstances:

  • Landing a new job.
  • Welcoming a new child through birth or adoption.
  • Getting engaged, married, or divorced.
  • Being within a few years of retirement.
  • Changing tax brackets due to a change in your salary or wages.
  • Filing for bankruptcy.
  • Receiving an inheritance.

This list represents just several common scenarios where you could benefit from receiving individualized tax advice to update your withholdings.

Can I adjust my tax withholding at any time?

Yes. The IRS recognizes that employment and family situations change, and that people may need to update their federal withholding amount occasionally. You may also want to update your tax withholding due to several other situations that can impact your tax liability. These include:

  • Adjustments to your income, such as taking an IRA or 401(k) withdrawal, or a new requirement to pay alimony.
  • Purchase of a new primary, vacation, or rental property.
  • To account for itemized deductions and tax credits, including the child tax credit, dependent care expenses, charitable donations, earned income credit, education credit, student loan interest, interest expenses, dependent care expenses, or medical expenses.
  • To account for taxable income not subject to typical withholding. Examples include IRA distributions, self-employment income, capital gains, dividends, and interest income.

When you need to adjust your W-4 selections, ask your employer for a copy of your current Employee’s Withholding Certificate (W-4 form) and a new W-4 form. You can use the Tax Withholding Estimator on the IRS website to determine how much to adjust your withholding amount.

If you have more questions about how and when to update your tax withholdings, or any other legal questions, reach out to a Rocket Lawyer network attorney for affordable legal advice. If you need tax help, Rocket Lawyer now offers tax services with Rocket Tax™. Don’t do your taxes™ - Let us do them for you.

This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.


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