Don't wait until tax time to learn what your tax liability is
The job market has experienced dramatic changes over the last two years. Working from home, at least part-time, is more the norm than a luxury for many office workers. The tight labor market combined with work-at-home capabilities means more opportunities for previous stay-at-home parents to join the workforce. Others were able to negotiate higher salaries at their current employer. Job-switchers and remote workers moved to new areas for a better lifestyle and no commute. Changing jobs means new paychecks and benefits. Fortunately, this translates to higher incomes for beneficiaries of the recent labor market cycle.
The downside to increased income is a larger tax bill, especially if you qualify for a higher tax bracket. It is important to be mindful of your payroll deductions and estimated tax liability. Filling out a new W-4 is necessary when changing jobs, but not for raises. Also, if a partner begins working, only they need to complete a new W-4. Bottom line, it makes sense to review your withholdings so there are no surprises at tax time. Changing financial situations is a cause for filling out a new W-4 but can you may update it any time you choose.
When it comes to filling out a W-4, some choose to withhold more than necessary in anticipation of receiving a refund. Others withhold less and end up owing the IRS when they file their tax return. Ideally, the amount withheld should closely approximate your estimated tax bill as to not create a large liability, nor receive a large refund. Receiving a refund feels good, but if you are withholding too much you are giving the IRS an interest-free loan. If you can afford to withhold more than necessary, there are better options available for your money.
The Paycheck Checkup on the IRS website is a helpful tool. It allows you to estimate your tax liability and how much you should have withheld.
Our partners at eMoney also provide guidance about filling out a W-4. Open the link for more.
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