Five People That Should Update Their W-4 Tax Withholding Form

How often do you review your W-4 to ensure you are having the correct amount of taxes held by your employer?

Many tax and financial experts are encouraging taxpayers to review their withholdings because you could be having more tax taken out of your pay than you will be liable for at the end of the year.

The following circumstances should prompt a review of your W-4 Form to ensure you are claiming the correct number of exemptions.

1. Your spouse has been laid off or quit working. Usually, when both spouses are employed the taxpayers tend to increase their W-4 withholdings. The loss of a job for either of the spouses could be reason to reduce the federal tax withholding by claiming the maximum allowable exemptions.

2. Your spouse owns and operates a small business. Couples with an employed spouse and a small business owner may have increased their federal withholdings at the job to ensure they meet the income tax obligation from their spouse’s business profits. However, for the last tax year the profits from their spouses business may have either been eliminated or substantially reduced. These taxpayers might find it necessary to file a new W-4 Form and reduce their federal income tax withholdings to reflect the reduced tax liability from the spouses business.

3. You have recently had a baby or took on elderly parents as dependents. People in this situation may also find they are entitled to additional dependent allowances. Thus, they should consider filing a new W-4 Form to reflect the additional dependent allowances the taxpayer is entitled to claim on their tax returns.

4. You sustained substantial capital losses in the stock market. Capital losses can be claimed against your salary and other ordinary income. These taxpayers could be entitled to claim an additional withholding allowance.

5. You received a salary reduction or making less money now. Taxpayers might find themselves being placed in a lower tax bracket due to a new job or reduced income. Both these factors could entitle the taxpayers to reduce his federal income tax withholdings by claiming additional allowances.

A strategy of overwithholding so you can plan for a tax refund may not be a smart idea if you’re faced with an extremely difficult time meeting your current financial obligations. It’s better not to use credit cards or lines of credit to fund your current obligations and instead, increase your paycheck by maximizing your dependent allowances you are legally entitled to by the IRS.

This article is provided for informational purposes. Always seek advice of a competent financial advisor with any questions you may have regarding a financial matter.