How to Help Your Clients Adjust Their Witholdings

Female tax preparer smiles at a client

No one likes to be surprised by an unexpected tax liability. Unexpectedly large refunds are much more welcome, but they also mean your client gave the government an interest-free loan throughout the year. You can make sure your clients avoid both by helping them maintain correct tax withholdings through all their major life changes. Here are some of the most common life changes that require adjustment to tax withholdings, plus tips to make sure your clients know how and when to adjust.

The Most Common Reasons to Adjust Federal Tax Withholdings

Getting (or losing) a new job or other source of income

Changes in income are the most common reason to adjust withholdings. If your client is starting a new job, they’ll fill out a new Form W-4 with their employer. However, this form doesn’t automatically take into account what they were making earlier in the year. If the new job pays significantly more than their previous job, they may need to add “Extra Withholdings” on line 4(C) of the form to make up for the difference. If they’re unsure what to put on their new W-4, the IRS Tax Withholding Estimator will account for what they’ve earned and withheld earlier in the year and their expected earning throughout the rest of the year. It will give them an exact estimate of their expected refund or tax liability and make recommendations for how much to withhold each pay period. 

Form W-4 actually instructs taxpayers to use the Withholdings Estimator if they:

  1. Expect to work only part of the year;
  2. Have dividend or capital gain income, or are subject to additional taxes, such as Additional Medicare Tax;
  3. Have self-employment income; or
  4. Prefer the most accurate withholding for multiple job situations.

Giving birth to or adopting a child

Welcoming a new child comes with significant tax benefits, namely the Child Tax Credit. Adjusting withholdings is usually fairly simple; a new form W-4 that lists their new dependent is all that’s needed. Adopting a child comes with additional tax credits that may lead to further adjustments. 

Getting married or divorced

Whether your client is getting married or divorced, they should immediately reexamine their withholdings based on their new filing status. Even if a couple gets married late into the year, they’ll still be taxed as if they were married the entire year. They can get ahead by adjusting their withholdings accordingly as soon as possible, even if it’s months before they’re actually married. Again, the IRS Withholding Estimator can help them determine what they should withhold based on their and their future spouse’s income. 

Similarly, clients who are getting divorced can adjust their withholdings earlier in the year if they expect the divorce to be finalized before the end of the year. (If it isn’t, they can technically still file jointly if they prefer). They’ll also need to consider which parent will claim any dependent children on their return and adjust their withholdings accordingly. 

How to help your clients adjust early

Of course, you can’t help your clients if you don’t know when these changes occur. Unfortunately many may not know that you can help or even that they need to adjust their withholdings. Client education can help. Utilize your social media accounts, emails, and mail advertising to educate clients on common life changes that require withholdings adjustments and offer your services in calculating those adjustments. This can be as complex as an in-depth email series on situations that require adjustments or as simple as a few lines on a postcard. 

If you learn in an in-person meeting that a client is facing one of these life changes in the near future, be sure to remind them to adjust their withholdings accordingly as soon as possible. 

Ultimately, many clients will be able to handle the adjustments themselves, but even with the IRS Withholdings Estimator, some calculations are tricky and clients will be grateful for your expertise. 

This article is up to date for tax year 2021 (returns filed in 2022).

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