Should you Update your W-4?

Remember the tax form you filled out when you first got your job ‒ the form that told your employer how to calculate your federal income tax withholding? That was Form W-4, Employee's Withholding Allowance Certificate. If you received a big tax refund or owed the IRS a lot of money for 2014, it's probably time to update your W-4.

Filing a new Form W-4 with your employer allows you to adjust your income tax withholding to avoid overpaying or underpaying tax for 2015. The form comes with a worksheet to figure out how many allowances you should claim. These allowances are similar to dependency exemptions on your income tax return. However, the total allowances on your W-4 don't have to agree with the exemptions you claim on your return. For example, say you're single and you want to have the maximum amount withheld from your paycheck. You can claim zero allowances on Form W-4. You'll still claim your personal exemption on the federal income tax return you file next April.

One caution: You should not claim more exemptions than you're entitled to on Form W-4.

What if you want to increase the tax withheld from your paychecks? You can specify an additional dollar amount on Form W-4. This can be useful when you receive income not subject to withholding and you don't make estimated tax payments.

When updating your W-4, keep a few rules in mind. Generally, you must pay (through withholding or quarterly estimated payments) at least 100% of last year's tax liability (110% if your adjusted gross income is over $150,000), or at least 90% of what you'll owe for this year.

Updating your W-4 can help adjust your withholding to match the tax you expect to owe. If you need assistance completing the form, give us a call.