Adjusting your tax withholding might not sound like the most exciting task, but it can make a significant difference in how much money you take home each paycheck. If you're getting a big tax refund or owing a lot of money in taxes at the end of the year, it's likely time to adjust your withholding.

In this article, we'll explore how to adjust your tax withholding, why it's important, and what you need to consider before making any changes. So, let's hop into it!

Why Adjusting Your Tax Withholding Matters?

This is the amount of money your employer deducts from your paycheck to pay for your federal income tax. If you always get a tax refund, you are probably withholding too much. Conversely, if you owe a lot when tax time rolls around, you might not be withholding enough. The trick is to find the right balance that works for your financial situation by adjusting your withholding.

Proper withholding ensures one doesn't overpay or underpay the taxes. Overpayment would ensure a refund, which an individual might smile upon. However, that cash would be useful in accumulation, saving, and achieving one's ultimate goals and objectives. However, underpaying does attract penalties along with interest if you need more to file your returns.

5 Key Steps to Adjust Your Tax Withholding

Step 1: Obtain a W-4 Form

The first step would be to acquire a copy of IRS Form W-4. A copy of the W-4 is accessible directly through the employer or the IRS. The W-4 is a document that would be used in calculating what amount of federal income taxes should be withheld from an employee's paycheck as a result of the information presented.

Step 2: Assess Your Current Situation

Before making any changes, review your current tax situation. Do you typically get a refund, or do you owe money each year? Consider changes in your life that might affect your taxes, such as getting married, having children, or taking on a second job. These factors can impact your withholding amount.

Step 3: Fill Out the W-4 Form

The W-4 comprises sections that will determine exactly how much tax is being withheld from your paycheck. You would fill in personal details, your tax deductions, and other extra amounts you would like them to withhold from you. The IRS reformulated this form in 2020, making it simpler and preventing individuals from claiming more allowance than is allowed by the state.

Step 4: Submit the W-4 to Your Employer

Once you’ve filled out the form, submit it to your employer’s payroll department. The changes will typically take effect in the next pay period, but this can vary depending on your company’s payroll schedule.

Step 5: Review Your Paycheck and Tax Situation

After your withholding adjustments are made, monitor your paycheck to ensure that the correct amount is being withheld. If your situation changes throughout the year, you may need to fine-tune your withholding further.

4 Common Mistakes to Avoid When Adjusting Your Withholding

Not Accounting for All Income: If you have multiple jobs or sources of income, make sure you're considering all of them when adjusting your withholding. Failing to account for additional income could lead to underpayment and penalties.

Focusing Only on the Refund: Many people adjust their withholding with the goal of receiving a large refund, but this is not always the best strategy. A large refund means you've overpaid your taxes throughout the year, which means you gave up money that could have been used for savings, debt repayment, or investing.

Ignoring Life Changes: Major life changes, such as marriage, having children, or starting a new job, can affect your tax situation. If you don't update your withholding after these events, you could end up withholding the wrong amount.

Not Recalculating Mid-Year: Sometimes, your financial situation can change during the year. If you get a raise, take on additional work, or face unexpected expenses, it’s a good idea to revisit your withholding to ensure you're still on track.

When to Adjust Your Tax Withholding?

Getting Married or Divorced: Changing your marital status can impact your tax bracket and withholding needs.

Having Children: If you’re claiming dependents, it could reduce your tax liability, which may allow you to adjust your withholding.

Changes in Your Income: A raise, bonus or additional job can increase your taxable income, requiring adjustments to avoid a big tax bill.

Buying a Home or Renting: Homeownership and changes in living arrangements can sometimes result in deductions or credits that affect your withholding.

Tax Law Changes: It’s always a good idea to stay informed about any changes to tax laws that could impact your withholding. For example, tax cuts or changes in tax credits may change how much you should withhold.

Final Thoughts: A Comprehensive Overview

Adjusting your tax withholding can seem like a small detail, but it has a big impact on your finances. Take the time to understand your withholding and make some changes when it is not right, thereby preventing over-withholding or under-withholding of taxes. Keep a record of your income, your life changes, and what's happening in the tax world, and do not think twice about using the Withholding Estimator provided by the IRS to help you be right. The key is finding the balance that works for you so you don't have to worry about a large refund or a hefty tax bill when you file your return. With the right withholding adjustments, you can keep more of your hard-earned money in your pocket throughout the year and ensure that you’re meeting your tax obligations without unnecessary stress.