Now is a good time to adjust withholding allowances for 2015 federal and state income tax purposes. Employers are allowed up to 30 days to implement any change so start now to have the right amount withheld.
Things you might want to consider:
- This is our third year with the new Net Investment Income tax (NIIT). The NIIT is a tax on investment income that is partially used to fund the Affordable Care Act (a/k/a Obamacare). NIIT generally includes interest income, dividends, capital gains, capital gain dividends, rental income and other passive income. The NIIT is an additional 3.8% on investment income for married people with more than $250,000 of income (jointly) and single people with more than $200,000 of income. The IRS has a page dedicated to the NIIT.
- The NC individual tax rate changed again on January 1, 2015. This probably is not a big deal for NC withholding purposes as NC adjusts the withholding tables accordingly. It may have a small impact on your expected 2015 federal income tax for those who itemize as their state income tax deduction may be lower.
- Your income and/or deductions may have changed. For example, you have a new dependent or lost a dependent. If you bought a new home, you may have a higher mortgage interest as an itemized deduction for 2015 resulting in the need for more withholding allowances to reduce your withholding to more closely match what you owe.
- It is the beginning of the year so it is much easier to increase or decrease your total withholding to more closely match what you owe.
- The IRS and the states charge a penalty for paying in too little regularly during the year.
- Finally, very few people like to owe at the end of the year.
Where to get the forms:
Making the calculation:
Please read the withholding allowance form instructions carefully and make sure you understand them. Reading just the form and making assumptions can lead to the wrong amount of withholding and possibly a penalty. If you may owe alternative minimum tax, have a lot of income without withholding (e.g. interest, dividends, capital gains, or Social Security), and/or you are married and both spouses work then the calculation is more complex than it is for the single person with no dependents and claiming the standard deduction. If you cannot figure out the forms, please get some help.
All other things being the same, increasing withholding allowances decreases the amount of tax withheld. And the opposite applies, decreasing withholding allowances increases the amount of tax withheld.