To adjust your tax withholding, which was historically managed through "exemptions" or "allowances" on older versions of the W-4 form, you will typically need to complete either Form W-4 or Form W-4P, depending on your source of income. While the term "exemptions" is no longer directly used on the current Form W-4, these forms are how you manage the amount of income tax withheld from your pay or payments.
Understanding Form W-4: For Employees
If you are an employee, you should complete a new Form W-4, Employee's Withholding Certificate, to change your tax withholding. This form helps your employer withhold the correct amount of federal income tax from your wages. The current Form W-4, redesigned for 2020 and later, replaces the concept of "withholding allowances" with a more direct approach to account for tax credits, deductions, and other income.
- Who uses it: Individuals who receive wages as an employee.
- Purpose: To inform your employer how much federal income tax to withhold from your paychecks. This adjustment ensures that you pay enough tax throughout the year to avoid a large tax bill at filing time, but not so much that you receive a disproportionately large refund.
- When to submit:
- When starting a new job.
- After significant life events (e.g., marriage, divorce, birth or adoption of a child).
- If you get a second job or start a side business.
- If there are substantial changes to your itemized deductions, tax credits, or other income.
- Where to get it: You can usually obtain Form W-4 from your employer, or directly from the Internal Revenue Service (IRS) website.
- How to submit: Complete the new Form W-4 and submit it to your employer's payroll or human resources department.
Understanding Form W-4P: For Pension and Annuity Recipients
If you receive payments from a pension, annuity, or certain other deferred compensation, you will need to complete a new Form W-4P, Withholding Certificate for Pension or Annuity Payments, to change your withholding.
- Who uses it: Individuals receiving periodic pension or annuity payments, or other deferred compensation.
- Purpose: To specify the amount of federal income tax you want withheld from your pension or annuity payments.
- When to submit:
- When you begin receiving payments.
- If you wish to change your withholding amount due to changes in your financial situation, deductions, or credits.
- Where to get it: You can usually obtain Form W-4P from your payer (the institution or plan administrator providing your pension/annuity) or the IRS website.
- How to submit: Complete the new Form W-4P and submit it to your payer.
Why Change Your Withholding? (Adjusting Your "Exemptions")
Adjusting your withholding, which served the purpose of changing "exemptions" in the past, is crucial for managing your tax liability throughout the year. The goal is to have your withholding closely match your actual tax liability, avoiding both underpayment penalties and excessively large refunds (which means you're giving the government an interest-free loan).
Common reasons to adjust your withholding include:
- Changes in Marital Status: Marriage or divorce can significantly impact your tax bracket and standard deduction.
- Dependents: The birth or adoption of a child, or gaining a qualifying dependent, can make you eligible for tax credits.
- Multiple Jobs or Households with Two Earners: Having more than one job or a spouse who also works can lead to under-withholding if not accounted for.
- Significant Deductions or Credits: If you expect to claim a large amount of itemized deductions (e.g., mortgage interest, state and local taxes) or tax credits (e.g., child tax credit, education credits), you might want to reduce your withholding.
- Non-Wage Income: Income from investments, self-employment, or other sources might require you to adjust your withholding or make estimated tax payments.
Key Forms for Withholding Adjustments
Here’s a quick overview of the forms needed:
| Form | Who Uses It | Purpose | Submit To | Credible Source |
|---|---|---|---|---|
| Form W-4 | Employees receiving wages | Adjust federal income tax withheld from your paycheck | Your Employer | IRS Form W-4 |
| Form W-4P | Individuals receiving pensions or annuities | Adjust federal income tax withheld from pension or annuity payments | Your Payer | IRS Form W-4P |
Always ensure you complete the most current version of the form and submit it promptly to your employer or payer to reflect your desired withholding changes.
