Paycheck Chronicles

Withholding: Don't Set It And Forget It


This time of year, lots of people are reviewing their tax returns and thinking about how they could change their tax situation for this year.  For most of us, the goal is to neither receive a big return or own a lot more in taxes.  The key to all this is withholding.  Withholding is the process by which you "pre-pay" some or all of your income tax liability throughout the tax year.  Withhold too much, and you'll have a big return.  Withhold too little, and you'll have a large payment due.  Withhold just the right amount, and you'll hit that sweet spot where you only owe or have refunded a small amount.

Unfortunately, even once you get your withholding set to the right amount, you can't just forget about it.  Life changes happen all the time, especially for military families, and many life changes result in a change in your tax situation.   Here are some of the common things that will impact your tax liability:

  • getting married,
  • having a baby,
  • having a child grow up,
  • getting divorced,
  • getting a 2nd job, or giving up a 2nd job,
  • a spouse getting a job, or quitting a job,
  • buying a house that impacts your tax situation,
  • turning a house into a rental property,
  • having surprising expenses on your rental property,
  • increasing your income (such as with a promotion), or
  • selling a house that impacts your tax situation.
With so many things changing your tax situation, it is really hard to get your withholding right every year.  It's even harder if you don't make adjustments as your life changes.  That's why I encourage you to review your withholding regularly, at least once a year, and see if it needs to be adjusted.

Some of my most ambitious friends review their taxes several times a year, using their year-to-date information to project their final year-long tax liability and adjusting their withholding as they go.  I used to do this, and I probably should start again, but life got busy.

Dealing with taxes is a little easier when the result isn't a big surprise, and keeping an eye on your withholding is the way to make that happen.  You can adjust your withholding through the MyPay system, as frequently as you feel necessary.  If you're unsure how much you should be withholding, you can use the IRS withholding calculator, or get help from the personal financial counselors at your family readiness center.

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