Many people look forward to their tax refund each year, much like a bonus. The interesting thing is that a large refund may be a sign that your paychecks are too small. Many people complete their W-4 when they first get a new job and don’t look at it again. We’re here to tell you that you should adjust it often as your salary changes and life events happen. Below, we walk you through scenarios where adjusting your W-4 might be necessary. It might be helpful to check your withholding status just to be safe. We also have our W-4 Withholding Calculator available to assist you in setting the proper amount to be taken out.
Having a child is a major life change, and a major change to your tax status. Your new bundle of joy may enable you to qualify for the Child Tax Credit or the Child and Dependent Care Credit. The Child Tax Credit is dependent on the number of children you have and your income. If your total household income will be less than $61,000 (single parent) or $90,000 (married couple) you can add two withholding allowances per child. If you have three to seven children, subtract one of the allowances. The Child and Dependent Care Credit comes into play if you plan on spending $1,900 or more on child care. The average cost of child care in the United States is $11,666 a year per child, according to the National Association of Child Care Resource & Referral Agencies.
Jumping the broom affects your tax status, switching you from single to married. When you file jointly, you qualify for additional deductions and maybe a lower tax rate. On the other hand, if you file for divorce, you’ll need to change your status back to single.
The most common instance where you will need to make adjustments to your W-4 is if your household income changes. This includes you or your spouse getting a second job, changing jobs, or becoming unemployed. As your tax bracket changes, you should adjust how much is withheld as well. Once it’s all said and done, you want your tax refund to be as small as possible or even zero. Some people like the large tax return, and that’s fine. Yet think of it this way – would a bank loan you money for a year and not require you to pay interest? When you receive a tax return, it’s similar to you giving the United States Government an interest free loan.