You may need to check your withholding tax when you experience significant events in your life, such as getting married or divorced, having a child or adopting a child, or gaining or losing a dependent. Becoming a homeowner is a change that will provide you with the opportunity to claim itemized deductions that you could not have previously claimed, such as mortgage interest and property taxes. Your retirement is also a significant event in your life that can have an important effect on your taxes.
If your spouse dies, you can still use the married filing jointly status for the year of your spouse’s death. If you are a qualifying widow(er) with dependent child, you may still qualify for the lower tax rate for two more years. But if you do not qualify, you may need to change your withholding to a single status.
When Your Financial Situation Changes
Changes in your financial situation include changes in the level of your income, changes in the type of income you receive, and changes in the adjustments, deductions or credits you can claim for tax purposes.
For example, if you are married and your spouse began working, stopped working, or if either of you had significant changes in your income, one of you or perhaps both of you may have to adjust your withholding. If you (or your spouse, if married) started or stopped working at a second job, this will also affect your overall income and your taxes. A new job, a promotion, or a layoff may also have significant effects that need to be taken into account.
If you have significant increases in your income other than the salary or wages you earn, such as interest, dividends, capital gains, or rent, you may have to either adjust your withholding, or make estimated tax payments. If your salary or wages are not sufficient to have enough tax withheld to cover your tax liability on sources of income that are not subject to withholding, you may need to pay estimated taxes.
If you start your own business, your earnings will not be subject to withholding. And your business earnings will be subject to self-employment tax (the equivalent of social security and Medicare tax) in addition to federal income tax. You will have to cover these taxes during the year either through the withholding tax on the pay you receive from an employer, or by making estimated tax payments.
Your adjustments to income, itemized deductions, and tax credits may vary from one year to another. Adjustments to income include deductions for IRA contributions, moving expenses, tuition and fees, interest on a student loan, and alimony paid. Itemized deductions include medical expenses, charitable contributions, mortgage interest, sales tax, and job-related and other miscellaneous expenses. Significant variations in your adjustments to income or your itemized deductions can affect your tax liability for the year. You may need to determine their effect and adjust your withholding accordingly.
Tax credits include the earned income credit, child tax credit, child and dependent care expense credit, and the education credits, including the Hope and lifetime learning credits. You may qualify for tax credits for which you did not qualify before, or there may be new credits available to you. This could reduce your ultimate tax liability, and you may want to adjust your withholding in expectation of a lower tax.