How to Fill Out a W-4

How to Fill Out a W-4

 

No matter how many times we fill out a W-4 it can still be confusing. Not to mention, how you fill out a W-4 will most likely change over your lifetime and the number one question will always remain, “How many allowances should I claim?”. Although, we can’t provide you with the exact answer (that’s one for your CPA or accountant😉), what we can do is share some tidbits of information to help you make the decision that best suits you.

 

First things first, what is a withholding allowance?

In a nutshell, this number tells your employer how much money you want withheld from your paycheck to cover any state, federal and local taxes you may owe. In other words, the more allowances you claim the less money that is taken out of your paycheck.

What this means for you in the long run…

According to most personal finance professionals, the goal is to claim the number of allowances that will cover your tax liability closely, meaning no refund and no monies owed.

If you prefer to play it on the safe side and reap the benefits of a bigger refund check come tax time, then claiming a lower number may be the best fit for you. “0” is the lowest number that can be claimed which will result in more money being taken out of your paycheck and a higher tax return.

If you prefer to retain more money in your regular paycheck and worry about the tax implications later, then claiming a higher number of applicable allowances may be the solution for you. However, the more allowances claimed the more likely you may be to owe come tax time.

To paint a better picture, people typically claim between 0-3 withholding allowances on their W-4.

Still not so sure? Luckily, the worksheet is there to help you!

Every W-4 includes a 10 question “Personal Allowances Worksheet” that is designed to help you make the most logical decision for your current situation.

Here’s the breakdown:

In Lines A-C people typically claim

  • “1” for themselves as a personal allowance
  • “1” if they are married and filing a joint return
  • “1” if they file as head of household

In Line D people would only claim “1” if they:

  • are filing “married filing jointly” and have a spouse that does not work
  • are single and have only one job
  • have a second job that pays less than $1,500 OR their spouse’s job pays less than $1,500

Lines E-H can get a little dicey, so be sure to read carefully.

E. Child Tax Credit (CTC):

This allows you to reduce your federal income tax bill by up to $2,000 for every qualifying child under the age of 17 that you claim as a dependent. Just to be clear, the child must be under the age of 17 through the end of the year to qualify. You also will not qualify for the CTC if you earned an income under $2,500 or over $200,000 ($400,000 if married filing jointly).

  • How does a tax credit differ from a tax deduction?

A tax credit like the CTC means at the end of the year, if you owe the IRS $6,000 and you have a $2,000 credit for your one 12-year-old son, you will owe the IRS $4,000 instead.

A deduction on the other hand, reduces the amount of your income that is subject to tax.

  • Is the CTC refundable?

$1,400 of the tax credit is refundable thanks to the tax reform bill. This means if you owe the IRS $1,000 and you have a $2,000 tax credit, the IRS will reduce your tax bill down to zero and issue you a refund of $400.

  • How to claim the tax credit:

Review the criteria in Section E and insert the applicable number on Line E. For example: If your total income will be less than $69,801 ($101,401 if married filing jointly) then you are eligible to claim “4” for each qualifying child.

F. Credit for other dependents:

This is a $500 tax credit available for dependents who do not meet CTC criteria.

  • How to claim the tax credit:

Similar to the Child Tax Credit, you will review the criteria in Section F and insert the applicable number on Line F. For example: If your total income will be between $69,801 and $175,550 ($101,401 – $339,000 if married filing jointly) then you will claim “1” for every two dependents. Be sure to read each bullet point carefully as the instructions change.

G. Other credits:

If you think you have other credits that can be converted into withholding amounts, refer to Worksheet 1-6 of Pub. 505 to see if your credits are eligible.

H. TOTAL!

Yippee 🎉 you’re all done! Now, add up lines A-G and reveal your coveted withholding number.

You can also check out our W-4 Personal Allowances Video to help you better understand the amount you should be claiming.