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Is It Time to Update Your Tax Withholding?

The Tax Cuts and Jobs Act of 2017 (TCJA) reduced many Americans’ overall tax liability—and in response the IRS decreased the amount of tax withheld from workers’ wages.

As a result, quite a few taxpayers ended up underwithholding taxes—and some even ended up owing money when they thought they’d be receiving a refund.

To help address potential underwithholding, the IRS introduced a new Form W-4, or Employee’s Withholding Certificate, for 2020. It replaces allowances—the personal exemptions taxpayers could claim to reduce the amount of taxes withheld—with a five-step process meant to help taxpayers more accurately calculate their withholding based on marital status, number of dependents, and other income adjustments.

Unless you started a new job this year, you aren’t required to fill out a new form. However, if you withhold too much based on any allowances you claimed in the past, you’re effectively giving the U.S. Treasury an interest-free loan until you receive your refund. If you withhold too little, you potentially risk having to cut a big check to the IRS on Tax Day—and you could get hit with underpayment penalties to boot.

 “The goal should be to get your withholding as close as possible to the amount you’ll owe in taxes,” says Hayden Adams, CPA, director of tax and financial planning at the Schwab Center for Financial Research.

Even if you didn’t end up owing money to the IRS this year, you may still want to update your W-4 if:

  1. Your income changed: “It’s wise to review your tax withholding anytime you experience major changes to your household income,” Hayden says. Likewise, if you recently got married, you both work, and you plan to file jointly, you’ll likely need to modify your withholding to account for higher household income.
  2. Your dependents changed: If you welcomed children to your family this year, you may be eligible for a child tax credit of up to $2,000 per child under the age of 17. Those with other qualifying dependents—such as children between the ages of 17 and 23 who are full-time students—may be eligible for a child tax credit of up to $500 per child.
  3. You expect to itemize your deductions:The TCJA effectively doubled the standard deduction, meaning fewer taxpayers itemize their deductions than in the past,” Hayden says. Even so, those who expect to itemize can choose to reduce their withholding commensurate with their deductions. However, if your situation changes and you take fewer deductions—or none at all—you’ll want to revisit your tax withholding ASAP.

The IRS Tax Withholding Estimator can help you calculate whether you should increase or decrease your withholding based on changes in income or other factors.

“In general, I recommend reviewing your withholding at the start of the year and then again about halfway through,” Hayden says, “particularly when there are changes to tax law or your personal circumstances.”

What You Can Do Next

Read more tax-planning insights from Schwab experts.

Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

This information does not constitute and is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner, or investment manager.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.


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