With the new payroll tax cuts signed to order, it was difficult not to get excited. It was awesome to get more in our paychecks to pay the bills. However, if you did not carefully evaluate how the tax cuts would affect you personally, you may not be celebrating April 2019.
What Is Your W-4 and Why Should You Care?
Your W-4 informs your employer the number of tax deductions you wish to take from your paycheck. It is your responsibility to ensure you have chosen the correct amount of exemptions. Overall, the more exemptions you choose, the fewer taxes withheld and more money in your paycheck.
Why Would I Change My Status?
Tax withholdings may have been reduced but make sure you are still withholding the appropriate amount for your exemption status. From marriage and divorce to kids moving out and beginning to pay their own ways, life shifts whether we’re ready or not. If you are withholding too much, you will have to pay the IRS, and if you are not withholding enough, your money is just sitting in the IRS reserve, rather than into your paycheck or an investment. My point being, if you are now a married adult with kids who have not changed their withholding status since leaving your parents’ house, now’s the time to review and submit a new W-4.
How Many Exemptions Should I Take?
Here are the standard guidelines:
0 Exemptions if you are a student and/or your parents still claim you as a dependent.
1 Exemption if you are single with a single job, BUT you will most probably get a refund.
2 Exemptions you can be married or single with children. If you are single with no children, you can still claim 2 exemptions and add a little extra withholding from each paycheck to get a more accurate take-home.
3 Exemptions and beyond if you are married with kids.
Guessing is fine if you are playing the lottery or a card game, but not for your taxes. Make a wise and informed decision. Get your most recent paycheck stub, go online to the IRS Online Tax Withholding calculator, and get your results.
What Should I Do Next?
Your employer has the capability to use your W-4 and then add a little more to be withdrawn. For instance, if you are single, and do not want the IRS to be your savings account, you could choose 2 Exemptions but then have an additional “$10” withdrawn each paycheck to put you more even for the end of the year.
What if you use the IRS calculator and it looks like you are going to owe money for this year? Do the same thing – have an additional amount withdrawn from your paycheck. Calculate what you owe and divide it by the number of paychecks (tax deposits) remaining.
Your money. Your country. Be wise.