Life and Tax Changes
For every major life change, you'll find associated tax issues. Don't think it's true? Let's see if I can convince you.
A new career
This might be one of the proudest days in your life, a time of new opportunities. Whether it's a part-time job while you're still in high school, or the dream job you accept after receiving your advanced degree, the issues are still basically the same: You'll be given a paycheck by a new employer, and Uncle Sam will take some of that paycheck in the form of income-tax withholding. How much will he take? That'll depend on how you complete your W-4 withholding form.
How should you complete your withholding form? That depends. If you're a student, you may be able to claim an "exempt" status, since your income is so low that you won't have a tax liability. If you have a spouse, children, and a mortgage, you may be able to claim additional exemptions to reduce your withholding. Be sure to pay attention to these factors:
- Filing status: Are you single, married, head of household, married filing separate, or a qualifying widow/widower? How you file will affect your desired withholding.
- Children/dependent status: Do you have kids? If so, it's possible that you'll qualify for the Child Tax Credit. Do you have to pay a babysitter to watch your child while you (or you and your spouse) are working? If so, you may qualify for the Dependent Care Credit. And if you're on the lower end of the wage spectrum, you might also qualify for the Earned Income Credit, in which Uncle Sam actually gives you back more in withholding than you've paid in. If you have a dependent other than a child (such as a parent), other deductions and/or credits might also apply to you.
- Other income/deductions: Do you have substantial other income, such as interest and dividends? If so, you'll have to adjust your withholding to make up for that additional income. How about deductions? If you have a mortgage or are otherwise able to itemize your deductions, you can adjust your withholding allowances upward to reflect your lower tax liability. Starting to pay off those student loans? Some of the interest you pay just might be deductible, so you'll want to adjust your withholding allowances accordingly.