Avoid Tax Surprises – Adjust your W-4!
It’s important for divorcees to review and adjust their W-4 payroll withholding or start to make quarterly tax estimates following their divorce. Often, they are so relieved to have reached settlement, they fail to think about these housekeeping items.
If divorced in 2018, this is especially important if transferring taxable spousal maintenance. The payor spouse can likely change their payroll withholding to increase their net income. The payee spouse will need to withhold additional tax dollars on their salary or make quarterly estimated tax payments, to account for taxes on the spousal maintenance payments received.
If the payor spouse doesn’t adjust their W-4, they may not be able to meet their budget during the year and would probably receive a large tax refund when taxes are filed. If the payee spouse doesn’t adjust their W-4 or start quarterly estimated taxes, they could have a large tax liability when they file their return.
Even if there isn’t taxable spousal maintenance, individuals still may need to adjust their withholding. Things that can impact taxes and often require an adjustment are a change in their filing status, pre- tax payroll deductions (retirement contributions, health savings account, health insurance premiums), and itemized deductions such as real estate taxes and mortgage interest.
Making these adjustments now will help cash flow match what was projected during the divorce process and save the headache later of a tax surprise.
More Collaborative Law Posts