Sep 03, 2022 By Triston Martin
In the U.S. tax system, most taxpayers follow the pay-as-you-earn (PAYE) method, where estimated income taxes are paid over the year and then recorded on tax day in the next year. Employers who are taxpayers are legally obligated under federal law to withhold a portion of the income earned by their employees for tax purposes by deducting a percentage of their regular pay.
To determine how much they deduct, employers base their calculations on the data that all new employees submit on the Formula W-4 form. If there is too much tax taken out, employees get refunds. But, the amount of tax withheld can change during the year. In certain instances, adjusting how much tax is taken out of your tax refund is sensible.
The amount of tax that is withheld is determined by the following factors:
Any changes to your household circumstances, like having a baby or an employee losing their job, could immediately affect taxes. In these instances, it's worth adjusting the amount of withholding you pay to ensure you don't pay a larger tax bill than you need to.
If you're married and file an income tax return jointly, the tax you pay could be affected in two ways. First, if your spouse earns income, household withholding could rise. In addition, your total withholding could decrease if your spouse isn't employed. There are other situations where filing separately is a good idea.
Divorce could affect your household's income, but there's also the issue of alimony. Alimony received a new tax treatment in 2019 due to tax reforms under the Tax Cuts and Jobs Act enacted in 2017. With the new tax model, the alimony payment will not be tax-deductible for the recipient, and the payer is not required to declare their alimony as income.
Adoption or birth of children instantly brings a new member to your household and decreases the overall tax burden to pay for the cost of having children. To maximize the most benefit of tax credits and deductions, consider reducing the amount of withholding.
If you are buying a house, you may need to alter your withholding to prepare to receive tax advantages. There are various tax credits for first-time homebuyers, and the tax benefits that the IRS approves are often altered. This is true for any major deductions or credits you could be eligible for in a specific year, including credit for education and dependent care expenses, medical expenses, and charitable donations.
The IRS offers a helpful withholding calculator on its website. Furthermore. Form W-4 includes instructions on the form and a separate set of directions. A summary of the steps needed to modify your tax withholding can be found listed below.