Become a W-4 wiz and get money back at tax time
When a person gets a new job, there is a mound of paperwork to fill out. A new employee must sign documents to express that they understand the policies and procedures of the company. Other forms determine whether the employee wants the job’s benefits plan. With so much information to consider, it can be easy to overlook one very important form. At the start of employment, each employee fills out a W-4 form to declare how many tax allowances they want, which the employer uses it to determine how much taxes to deduct from each paycheck. Many Americans were shocked to owe at tax time this year because of their W-4. Are you filing the proper allowances?
The W-4 explained
There are loads of conflicting advice about how to fill out a W-4, but the facts are extremely important when it comes to tax time. Allowances are expressed with that can be as low as zero. Allowances can be declared for various reasons, and one of the most common reasons to declare allowances is for the number of dependents that rely on taxable income to survive. For example, a married mother with two children would claim an allowance of four (one allowance each for herself, her husband, and her two children). A person with more allowances gets less taxes taken out of his or her paycheck. A person with less allowances gets more taxes deducted for his or her paycheck.
If a person has overpaid the IRS in taxes throughout the year, a tax refund check will be received at tax time. If a person has underpaid the IRS throughout the year, he or she will owe the IRS at tax time. Due to new tax legislation, many people were surprised to owe the IRS thousands of dollars at the end of the 2019 tax season. Why? According to the Tax Cuts and Jobs Act, old withholdings may no longer be sufficient. What can you do to protect yourself from an unexpected hefty tax bill?
Use your resources
As confusing as taxes are, filling out a W-4 is not rocket science. There are several pages to the W-4 form. The first few pages are called worksheets, and these walk through the process of determining how many allowances should be declared. Some employers only give people the last page, which has to be signed. Ask for all of the pages. Even if the process may seem redundant, use the worksheet. This ensures that the allowances align with IRS rules rather than faulty common knowledge. The managers and HR personnel that often handle new hire paperwork are not IRS employees or tax professionals. While they may have good intentions, the advice they offer should not be viewed as more reliable than what the IRS has written. The IRS website has a withholding calculator. Periodically, plug the numbers from a paycheck into that calculator. If the withholding is not correct, ask questions and change your W-4 accordingly.
The W-4 form itself will reportedly change drastically to reflect the big changes in tax code. Even if that change does not happen anytime soon, it is extremely important to be aware of how much taxes are being withheld from each paycheck. Examine the deduction for each pay period and make sure that it makes sense. Even if an employer makes an accounting mistake, the employee will still be responsible for paying the difference to the IRS.
At a minimum, consult a tax professional about your W-4 on a yearly basis to make sure that the number of allowances you are deducting is still acceptable. Be cognizant of the life events, such as marriage or having a child, that warrant changing the number of allowances on the W-4. Every employee has the right to change his or her W-4 at any time of the year for an unlimited number of times. Exercise your right if you find it necessary.