Adjusting Tax Withholding & Estimated Tax Payments

The United States income tax is a pay-as-you-go tax, which means that tax must be paid as you earn or receive your income during the year. You can do this either through withholding or by making estimated tax payments. If you do not pay your tax through withholding, or do not pay enough tax that way, you might also have to pay estimated taxes. If you did not pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax.

The Underpayment Penalty Rules:

Underpayment your taxes won't always result in an actual penalty.  Generally, you can avoid an underpayment penalty in the following scenarios:

  • You owe less than $1,000 in taxes after subtracting your withholdings and estimated tax payments
  • You had no liability the previous year
  • You paid at least 90% of the tax you owed for the current year or 100% of the prior year's tax liability--whichever is smaller.  However for taxpayers who earn more than the threshold amount ($150,000 for a married filing joint couple or $75,000 for a single person), you'll need to pay 90% of the current year's tax liability or 100% of the prior year's tax liability.  

What To Do If You're Underpaid

  1. Increase the amount of federal income tax withheld on your paycheck.  
  2. Make estimated payments.  Estimated tax payments are due on April 15, June 15, September 15, and January 15 th.  Each should be at least 25% of the estimated underpayment.

Adjust Paycheck Withholding

Tax withholding should be adjusted in the following situations: 

  • On your last tax return, you had a large refund or a large tax balance due.  
  • Your filing status changes – in the event of marriage, divorce or widowhood.
  • You have or adopt a child.
  • Your child turns 17 in a given tax year.
  • You buy a home.
  • Your income drops dramatically.
  • You take part in the gig economy or get a second job.
  • Your spouse gets a new job.
  • You are unemployed for part of the year.
  • You have paid off student loans.
  • You have a major increase or decrease in pretax retirement savings via a 401(k) or deferred compensation plan.

How To Adjust Withholding On Your W-4

To adjust your withholding, you need to submit a new Form W-4 to your employer.If you’re single with just one job, no dependents and you take the standard deduction, then the new form is easy to manage. You just have to fill out the top part (Step 1) with your name, address, Social Security number and filing status. Then skip steps 2-4 and provide your signature and date on the bottom of the form (Step 5).

If you’re married and both you and your spouse are employed and make about the same amount of money, you might be able to get away with doing the same as above, plus checking the box in Step 2(c). Each spouse would have to do this on their respective Form W-4. If one spouse earns considerably more money than the other, then too much tax may be withheld.

If you earn income from several sources or have dependents, it gets more complicated.

Step 1-Enter Personal Information

If you didn’t owe tax last year and won’t owe tax this year because you expect to earn less than the standard deduction amount for your filing status, then you can simply fill out the top part of the form and write “exempt” in the space below line 4(c) and sign and date the form. This exercise will need to be repeated each year, as the exemption status is good for one year only.

Step 2 Optional-Multiple Jobs Or Spouse Works 

If you have multiple jobs or your spouse works, this section allows you to adjust your paycheck withholding by taking other job related income into account.  

  • Use the IRS’online tool for best results.
  • Fill out the Multiple Jobs Worksheet on page 3 of the form.
  • Take the shortcut described earlier for two-income households with similar pay.

Step 3 Optional-Claim Dependents

This section takes into consideration tax credits you get when you claim dependents. Here you can also factor in education tax credits and the foreign tax credit, if you’re willing to get into the weeds of the instructions.

Step 4-Other Optional Adjustments

This section allows you to add in other items that may affect your tax liabilities.   

(a)  Enter the amount of other income earned from other than W-2 wages such as interest, dividends and Social Security. 

(b) Enter other deductions such as mortgage interest, charitable contributions, medical expenses and state and local taxes. If you are taking the standard deduction, you can add such deductions as student loan interest and deductible IRA contributions on the worksheet. However, do not add the actual standard deduction amount to the total as this will result in an error.

(c ) Extra Withholding.  If you have another job and you don’t want to share this fact with your employer, you can use the online tool to calculate your projected tax liability and then put an “extra withholding” amount in Step 4(c). 

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