End-of-Year Paycheck Checkup

It's finally December, which means it is finally time to bring out those Christmas lights, get family travel plans in order, shop for gifts...and....as I advise my clients, do an annual paycheck checkup!

An annual paycheck checkup involves reviewing the taxes your employer is withholding from your paycheck. Reviewing this ensures the right amount of federal taxes is being withheld from your paycheck. This may seem like a low priority item at year-end time, but it can help you avoid surprises at tax time! If there is too little being withheld, you may get a big tax bill, for instance.

The reason I recommend doing a paycheck checkup at the end of the year is to prep for the upcoming year (and tax year). As December rolls in and the year rolls out, many reflect on the past year and things that happened; everyone is making new year's resolutions and prepping for a new season. This should also include the financial aspect of life. Specifically, If the past year involved any major life changes (going from a 1-income to 2-income household, working multiple jobs, a change in dependents, large change in income, etc.), you may need to change your tax withholding for the new year.

When you do your taxes, you'll recall questions about your income, household size, dependents and more. These affect how much tax you owe and what credits and deductions you may be eligible for. If you're proactive and ensure your tax withholding from your paychecks reflect these life changes before tax time rolls around, you'll be better prepared come tax time. The government withholds federal taxes from your paycheck during the year and at tax time, your tax return figures whether too much tax was withheld (in which you'll get a tax refund) , or too little tax was withheld (in which you'll get a tax bill).

So, how do you do a paycheck checkup? First, access copies of your recent paychecks. You can utilize the IRS Tax Withholding Estimator. This is a great resource to estimate the amount of tax that should be withheld from your paycheck. If you find you need to change your tax withholdings, you'll need to fill out a new Form W-4 (One of the many forms you may remember having to complete when you started working at your employer). You can easily obtain this form from the IRS site. Once completed, simply submit it to your employer.

Lastly, I'll provide some general tips regarding withholdings. Though I advise my clients to do, at least, one paycheck checkup a year, this should be done whenever a major life event occurs that will affect your income and taxes. It is generally advised to increase the amount of tax withholdings when you obtain more than one job at a time and you and your spouse both have jobs, or you start getting income that is not subject to withholding. On the other hand, it is generally advised to decrease the amount of your tax withholdings when you become eligible for income tax credits, credits for dependents and/or you become eligible for deductions other than the standard deduction.

Please remember, every person's individual tax and financial situation is different, so it is best to reach out to your tax or financial advisor for your specific circumstance. I can help with general questions but can only provide specific advise to clients.

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