If you paid a large tax liability bill after filing your taxes, you might want to update your W-4 Form.
Are your friends on a summer vacation (thanks to their tax refund checks) while you’re stuck at home because you were forced to write a check for your tax due?
If you ended up writing a large check to the IRS for the total of your tax liability, it’s good to know that you’re (somewhat) in control of what that total will be next year. Surprisingly, it isn’t some randomly generated number, nor is it based on luck. In fact, it’s linked to the number of allowances listed on your W-4 form. That means, you’ll want to take a look at the number reported on your W-4 Form.
What a W-4 Form Is & How it Affects your Tax Refund
For those of you unsure of what a W-4 form is- it’s one of the forms you were handed upon your first days of employment at your job. To be more precise, a W-4 form is used by your employer to determine the amount of taxes to be withheld from your pay. The number of exemptions claimed on it directly affects your tax refund or tax due.
Basically, the lower the number reported on that W-4 means more tax withheld from your paycheck but less tax due at the end of the year. In other words, by the time tax seasons rolls around the majority of your tax liability will be paid and you might even get a refund.
If you were slapped in the face with a high tax due total when filing your taxes, chances are it’s because your W-4 allowance number is too high. Since filling out your W-4 upon starting your job, life changed but your W-4 didn’t. The number of exemptions you claimed on your W-4 is not the same number you would claim now.
What to Keep in Mind When Updating Your W-4 Form:
If you’re reassessing the number of exemptions on your W-4, keep in mind that there are certain factors that play a role. These factors include;
- number of exemptions your spouse is claiming on his/her W-4
- number of children you have
- if you’re claiming head of household
- number of jobs you have
Generally, each person you are claiming as a dependent along with yourself, should be counted as one allowance.
If you’re married, each spouse should not factor in each dependent. As a couple, you’ll want to claim a total based on factors such as the total number of dependents you’re claiming. For example, if you and your spouse have one child, as a couple you’ll claim a total of three allowances, allowing you to claim two on your W-4 and your spouse to claim one allowance or vice versa.
Keep in mind that lowering the number reported on your W-4 means a larger tax refund but it also means more tax is withheld from your paychecks.
When Life Changes, Your W-4 Should Too…
Who knows, maybe since you filled out that W-4 upon your first days of employment your children grew up and started filing their own taxes or maybe you got married and had children. Perhaps you picked up a side job. Regardless, these “life changes” impact your tax liability.
Here’s an example; you’ve always claimed your daughter as a dependent. Last year, she graduated from college and started working. Ultimately, your daughter’s entrance into adulthood left you with tax due because you never reduced your W-4 allowances to reflect that she’s no longer your dependent. That means, the amount of tax withheld from your pay wasn’t high enough and you ended up having to pay up during tax season. In this case, you’d want to decrease the number of allowances claimed on your W-4 so that your the W-4 withholding amount increases.
Still confused? If you’re unsure how many to claim but want a large tax refund, claim Zero or One on your W-4. Keep in mind, the maximum amount will be withheld from your paychecks.
Ultimately, you’ll need to ask yourself questions like “Do I want a larger tax refund or do I want larger paychecks?” From there, you can decide the number that’s right for you. Then, when it’s time to file your taxes, we’ll be able to help you receive the maximum refund possible.
Instead of writing a check to Uncle Sam, next year you’ll be able to join your friends on that summer vacation!
6/13/2014 Photo via Nana B Agyei on Flickr