The IRS has an astonishing number of forms available for people to use when calculating tax obligations. Some are more commonly used than others, and up at the top is the W-4. Almost all U.S. adults recognize this document, since it’s what your employer will welcome people with when they’re hired.
As long as you fill the W-4 out correctly, you’ll have the right amount of money deducted from your paychecks which will go toward your federal income taxes. For most people, the intention should to break even. Why? Because unless you know for sure that you have enough spare cash in the bank, it’s a bad idea to owe money to the government. If you don’t have the enough at the ready to send, you may have to enter into an installment agreement. Such a payment plan can keep the debt in good standing, but interest and other penalties accrue until you’re in the black. Another option is to pay the balance due with your credit card, but the issuer will charge you an extra fee for the privilege, and if you don’t delete the debt fast, an already expensive debt will become more costly.
On the other hand, a large refund is also not recommended, though it can sound preferable. When the IRS cuts you a big check, it can feel like a windfall. In reality, it’s less cash in your bank account to use each month. If you’re having a tough time meeting expenses because of it, you could end up leaning on your credit cards or other high interest loan to make up the difference.
The key to making sure you come out ahead by neither owing the IRS nor getting too much money back, says Sally Herigstad, a certified public accountant and the author of Help! I Can’t Pay My Bills, Surviving a Financial Crisis, is to complete the W-4 with the correct number of withholding allowances.
“The withholding allowances is a number that your employer uses to figure out how much to withhold from your paychecks,” says Herigstad. “The IRS made it so that each allowance is worth about as much as an exemption, which is about $4,050 for 2017.” Essentially, the more you claim on this form, the less income tax will be taken from your earnings.
On the W-4 you’ll see a series of letters. For A through G, you will write a number based on your circumstances. H is the grand total. So here’s how you should fill it out.
- You. Unless someone else is listing you as a dependent, put down a 1.
Your marital status. You’ll add a 1 if you fit any of these three circumstances:
– you’re single and working one job
– you’re married and working and you’re spouse isn’t employed
– your or your spouse’s wages from a second job (or the total of both) are under $1,500
- Your spouse. You’ve got a choice on this line. If you’re married you can put 1, but you can also choose to write in a 0.
- Your dependents. This is the number of children or qualifying relatives you can claim. A qualifying child has to be younger than you and, according to IRS demands “either younger than 19 years old or be a “student” younger than 24 years old as of the end of the calendar year.” Mind that there is no age limit for permanently and totally disabled children.
- If you are head of household. Pay more than half of the household expenses, you’ve been unmarried during the tax year, and have a qualifying child or dependent? In that case, you can score a tax advantage by adding a 1.
- You pay more than $2,000 in child or dependent care expenses. If so and you’ll also be claiming a credit, add in another 1! The financial requirement, though, does not include what you may pay for child support.
- You claim a child tax credit allowance. This line is a little complicated, as the number you list depends on your income and amount of dependent children. Essentially:
— if you earn up to $70,000 as a single person or a less than $100,000 if you’re married, enter the number 2 for each eligible child. Subtract 1 if you have two to four children or 2 if you have five or more children.
— Earn between $70,000 and $84,000 as a single person or between $100,000 and $119,000 if your married, enter 1 for each eligible child.
- Add them up! Remember, the fewer withholding allowances you list, the more money you’ll keep from each paycheck – but it can translate into a bill from the IRS. Conversely, the higher the figure for your withholding allowances, the more money will be taken out from your paychecks, so if you list too many you’ll get a refund.
In order to come as close to the neutral line as possible, play with the figures before you submit the form. “If you have few deductions, you may want to claim fewer allowances,” says Herigstad. “It’s not enough to just slap down the numbers.” She suggests using a good online estimator, like the one on Tax Act. It’s free and can help fine-tune the process for your specific situation.
And if you mess up? Don’t worry. While not ideal, you’ll either owe the IRS money that you would have paid anyway, or you’ll get money back that you can use for delayed expenses (or to repay debt that was a result of having too much taken out).
Take ownership of your federal income tax withholdings. If you fill out the W-4 and then believe you may be over or undergoing it after submitting it, complete another and tweak it so it makes sense for you. “Don’t be afraid to turn in a new form and see how it changes,” says Herigstad. “You can do it over, multiple times throughout the year. There’s no limit. The worst that can happen is you get on your human resource department’s nerves.”
