How Often Should You Review W-4s?
- Evaluate at least annually. That's the recommendation from the IRS. Some tax professionals recommend you review your W-4 early in the year so you get the full effect of the change throughout the year. Use your annual tax refund as a gauge to determine if you're withholding too much. If you're getting fat checks every year, consider adjusting your W-4. If you owe hefty sums, adjust your W-4.
- Review whenever your circumstances change. If you get married or divorced, have a baby, get a second job, decide to itemize your taxes, your stay-at-home spouse gets a job, or you buy house, check it out. All of these changes can affect your tax situation. Some may put more money in your pocket with less withholding, and others will cause more withholding and prevent you from getting a big tax bill.
- Determine whether your workplace has instituted any policies about how often you can change your form. This is rare, but some large employers do it because of the paperwork load. In other cases, the IRS may send "lock-in" letters to employers when there are cases of employees with serious "withholding compliance problems." In that case, they are required to disregard any changes to the W-4 when they'll result in less taxes being withheld.
- Your next paycheck and the results of your tax return are the best indicators of whether your withholding is on target. A big refund may bring on euphoria, but it's not a windfall. That's your money that's been sitting with the government, interest free, all year. The best course is to adjust your W-4 so that the amount of money withheld from your pay matches your tax liability as closely as possible.
