How To Fill out a W4
Generally, we think of tax refunds as a good thing (yay, cash in the bank) and owing the government money as a bad thing. However, did you know, if you’re getting a big tax return each year, you’re giving the government an interest-free loan on you? On the flip side, if you owe the government a large tax bill in April it can be painful to figure out how to cover the bill.
What determines your refund? The government takes (aka withholds) taxes out of your paycheck each time you get paid. If at the end of the year, the total amount they take out exceeds what you owe the government, you get a refund. If NOT, you pay the government the extra you owe. The more allowances that you have on your W-4 (the form that you filled out when you started your job) the less tax is withheld from your paycheck.
so how many allowances should you claim? here’s one way to fill out your w4 if you’re single with no dependents.
I am single and have no dependents. I have always had 1 allowance on my taxes. I never realized that I have the option to have 2 allowances. Most singles with no dependents will actually OVER PAY in taxes. This probably explains why I’ve always gotten a larger refund. That’s money that I could be putting towards my student loans or my retirement savings goals on an on-going basis. Instead I’m giving this money to the government on loan for 12 months while I pay my student loan company interest (ugh, I don’t want to think about that).
Below is a picture of the W4 personal withholding calculator. Currently, I only have 1 allowance in line A. I’m going to adjust my W4 (you can do this at any point in the year) to add an allowance in line D. This will give me two allowances. Note that the IRS does NOT consider a single person with no dependents a head of household. Make sure you do NOT put a 1 in line C. That is for people caring for a child or parent.
Many companies have a process for how to do this. My first step is going to be to reach out to HR to ask them my next step. If you use the IRS tax withholding estimator and like me see that you’re due a large refund, then I recommend that you also look at your allowances.
Here are a few more reasons to adjust your withholdings:
You got a big refund or you are expecting a big refund! Some people like to use their refund as a form of “forced savings.” They use the lump sum of cash to make big purchases. However, like I said above, this big refund is coming at the expense of money in your paycheck EACH month. For example, for someone making $100,000, a $3,500 tax refund could translate to $249 per month in extra income if you adjusted your withholdings. Turbotax has a great article with a table that shows you how to adjust your withholdings to get the right amount of extra income in your salary. If you absolutely love the “forced savings” approach, you can use the table adjust your withholdings to get that big refund check.
You had a “life change” (marriage, babies, raises, o my!) If you got a raise, bought a house, had a baby, got married OR divorced, moved to a different state, or started a side hustle that’s generating substantial income – your tax bill will have changed and you may not be withholding the right taxes. Here’s a good overview of life changes to look out for.
Your refund changed substantially and you are not sure why. Tax reform changed a lot of the rules. The IRS recommended that we all check our withholdings in 2018 after tax reform, but in shocking news, almost none of us did. Nerdwallet has a wonderful guide to all the changes, but here are a few that may have impacted you:
Your tax bracket changed and so did the standard deduction. Here’s a link to the new tax brackets. Remember just because your top marginal tax rate went down doesn’t mean your total taxes did. The standard deduction (what everyone gets to deduct from their taxes irrespective of charitable giving or kids or state taxes) also changed going from $12,000 for singles and $24,000 for married couples versus $6,500 for singles and $13,000 joint last year.
Tax breaks for homeowners and people who pay state-income tax got smaller. If you live in California or New York (states with high property tax and high income tax), your tax bill may have been an ouch this year. You used to be able to deduct state income tax & property tax from your federal taxes. Tax reform maxed out both deductions at $10,000. Let’s say your property taxes were $25,000 and your state income tax was $12,750. This year, you only got to deduct $10,000 or a $27,750 swing in tax deductions.
Child Tax Credit doubled to $2,000 & now applies to people making over $200K: Under the old law, only joint filers making less than $110,000 in adjusted gross income, qualified for a $1,000 tax credit per kid. Under the new law, joint filers making up to $400,000 adjusted gross income quality, AND it’s $2,000 and $500 for non-child dependents like parents.
The Bottom Line? It’s important that you get your taxes right so you are not under paying owing the IRS a large tax bill. On the flip side, you also don’t want to be loaning the IRS a lot of money for 12-15 months.
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