Some life events result in more taxes, while others entitle you to credits and deductions that lower your taxes. The list of these events is long, but here are 5 of the most common:
You get a second job Getting a second job is a common reason for needing to adjust your W-4. Do this whether you moonlight, have a home business, or get another full-time job. Any time your income goes up, your tax liability will likely increase, requiring a new W-4. If your extra income comes from a side job with no W-4, you can still adjust the W-4 at your main job to account for the increase in income.
Your spouse gets a job or changes jobs Any change of household income, whether up or down, could put joint filers in a different tax bracket and require both of you to modify your allowances. To ensure accuracy, use your combined income to figure the allowances. Once this is calculated, one spouse can claim all of them, or they can be divided between both W-4s.
You’re unemployed part of the year If you get laid off from your job and stay unemployed the rest of the year, you likely had too much tax withheld. But if you get re-hired in the same year, you’ll need to adjust for the downtime. To avoid paying too much tax, you should increase the allowances on a new W-4. We’ll show you how to do that below.
You get married…or divorced Tying or untying the knot will surely change your tax rate, especially if both spouses work. Married persons filing jointly qualify for a lower tax rate and other deductions. Getting a divorce will take you back to single status and reverse many tax benefits. If you fail to account for these events on your W-4 by adjusting allowances, your withholdings could be inaccurate.
You have a baby…or adopt one A new baby is more than a bundle of joy for you and your spouse. It’s a major tax event too. You can claim an additional allowance for a dependent and may qualify for the Child Care Tax Credit and others. Any of these could allow you to reduce your withholding to account for the added tax benefits. Leaving your withholdings as-is will likely result in a larger than expected tax refund.