3 Reasons It May Be Time To Update Your W-4

3 Reasons It May Be Time To Update Your W-4

For many of us, the only time we fill out a W-4 form is when we start a new job. But your W-4 can be updated any time of the year, and there are some circumstances that necessitate an update.

What is a W-4?

A Form W-4 is an IRS form that you fill out for your employer to determine how much money should be withheld from each paycheck for federal income taxes. Updating the information on your W-4 can help you avoid overpaying or underpaying your taxes throughout the year.

Reasons to Update Your W-4

If any of these situations apply to you, you should update your -W4.

You’ve Had a Major Life Change

Your marital status will likely change your tax rate, particularly if both spouses are working. Married couples who file jointly will qualify for a lower tax rate and other deductions than filing as single. Getting divorced can mean going back to single or head of household status, and you’ll lose many of the tax benefits you had while married. If you don’t update your W-4 to reflect these changes, your withholdings may be inaccurate.

Becoming a parent, whether it’s a biological child or you adopt, can be a tax event. If you’re eligible for the Child Tax Credit (For 2023, married couples with income under $400,000, families with a single parent with income under $200,000, and everyone else with income under $200,000), you can include the amount you will qualify for in your W-4 calculations.

Keep in mind that any amount received as an advance payment during the year must be subtracted from the credit you expect to receive on your tax return, as you will have already received the money. Adopting may mean you’re eligible for another tax credit. Any of these benefits may allow you to reduce your withholding to account for the additional tax benefits.

If you’ve taken a second job, you’ll need to claim extra withholdings on your W-4 to account for the extra income. Having two jobs may push you into a higher tax bracket, so you’ll need to withhold more of your income.

If you suffered a job loss and remained unemployed for the remainder of the year, you probably had too much in taxes withheld while you were working. If you do get a new job during the same year you were unemployed, you’ll need to adjust for the period you weren’t working. To avoid overpaying, you will need to adjust your withholding on a new W-4.

You Received a Tax Refund

Getting a tax refund seems like a good thing, a nice chunk of unexpected change. What it really means is that you’ve provided the government with a nice interest-free loan because you’ve been overpaying your taxes.

This is money that you could have been getting throughout the year in your paycheck and used for investing, saving, paying down debt, or anything else that would help advance your financial goals.

If your refund is a couple of hundred dollars, it’s not that important, but if it’s substantially more, consider discussing your withholdings and estimated payments with a tax professional so you can adjust your W-4 accordingly and retain more of your money throughout the year.

You Owed Taxes

The flip side of getting a big tax refund is getting a big tax bill, an even worse problem. It means you’ve underpaid your taxes and are subject to the IRS’s underpayment penalty. You are subject to the penalty if you don’t pay enough of your estimated taxes, don’t have enough withheld from your paychecks, or are late paying your taxes. To avoid the penalty, you must generally owe less than $1,000 or pay at least either 100% of the prior year’s taxes or 90% of the current year’s taxes.

If your adjusted gross income (AGI) for the prior year exceeded $150,000, you must pay the lesser of 110% of the previous year’s taxes or 90% of the current year’s taxes. Typically, the penalties for underpayment are 5% of the underpaid amount and capped at 25%. Underpaid taxes will also accrue interest at the rate the IRS sets each year.

Withholdings from your paycheck or distributions from retirment accounts are considered to have happened throughout the year, but estimated tax payments should be timed to correspond with the timing of when the income was earned or distributed. A tax professional can help in cases where income is uneven throughout the year.

This flow chart can help you navigate the situation:


And this one will help you navigate your W-4 withholdings:


This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor. If you have any questions about retirement planning or any other aspect of financial planning, reach out. We’re here to help you Life the Life You Love.

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