Claiming Exemptions—the W-4 for Dummies

w4 for dummies


I’ve been getting a lot of questions about how many exemptions to claim on the W-4 (Employee’s Withholding Allowance Certificate) form that you give to your employer.  People look at the whole 2 page form and get intimidated.  For most people—you should just ignore the rest and concentrate on the little part at the bottom of page one.  That’s the part in this screen shot up above.   It will make your life a whole lot easier.


First, some questions:


I claimed the wrong number of exemptions on my W-4 and now its tax time and I’m going to claim a different number of exemptions.  Will I get in trouble for this?

No you won’t.  Your employer doesn’t report you to the IRS for not claiming the right amount of allowances.  The worst that will happen is that you owe a lot at tax time or get a big refund.  (Actually I don’t think of getting a big refund as being a bad thing.  Probably shouldn’t call it a “worst case scenario.”)  Neither of those things are crimes.  It’s possible that the IRS could inform your employer to increase your withholding if the withholding on your W2 is not enough to cover your tax liability.  I have never seen that happen to anyone—but the IRS is allowed to do that if they think it’s necessary.


I don’t want any tax taken out of my paycheck.  Can I just claim EXEMPT?


No you can’t.  Exempt is only for people who will have no tax liability at all.  You might have gotten a refund last year, but it doesn’t mean you have no tax liability.  Generally, someone with no tax liability makes less than $5,950 for the entire year.    For most people, claiming EXEMPT is a really bad idea.


Okay, so what should I claim? Good question.  Here’s my suggestion list.  See what category fits your best.


You are a student, either in high school or in college.  You’re not married and you don’t have kids.  Your parents are allowed to claim you on their tax return (you’re under 24 years old.)  SINGLE, ZERO ALLOWANCES

You’ve got a job, only one job, you’re living on your own, and you’re single.  SINGLE, ONE ALLOWANCE

Now if you have a child, add another allowance for each child.  For example, let’s say you’re single with 2 kids, you’d claim single 3 allowances; one allowance for you and one for each of the children.


Single like above but you’re working two different jobs, SINGLE, ZERO ALLOWANCES – because the two jobs kick you into a higher tax bracket than the withholding would show.


You’re married and only one person works:  MARRIED, TWO ALLOWANCES

You’re married and you both work—you’ll each have your own W-4 and they will be different


Spouse #1 with higher paying job—claim MARRIED and all the allowances for the family



Now this is a pretty simplified guide, but it’s much easier to understand than what is on the form.  I also find that people are less likely to get into tax trouble with my rules than when you follow the allowances worksheet.


If you want a really good, accurate calculator to figure your proper withholding, the IRS has one on their website.  The problem is, as I’m posting this—the calculator is down.    You can use this guide for now and you can always tweak your withholding later when it’s back up.  Here’s the link:

Let the IRS Help You Pay for Your Vacation

Saving with the IRS.

If you have trouble saving money, then withholding extra in your taxes might be the way to put money away for a vacation. (Or whatever else you want to save for!)



Okay I can hear you now, “How can you get the IRS to pay for your vacation?”  That’s not what the title said; it says “help pay” for your vacation.  If I had a way for the IRS folks to pay for my vacation, I’d be blogging this from London instead of my living room.  (Olympics are on, I’m an Olympics junkie.  I’m working in front of the TV set today.)


But how can the IRS help you pay for your vacation?  By helping you save for it!


Face it; some people are great at putting money away and saving up for whatever they need.  This blog post isn’t for them.  This is for the folks that have trouble saving up for the things they want—like a vacation.  If you’re not a good saver, then this plan might work for you.


First, you need to figure out how much money you need for your trip.  I was looking at a little trip to Disney World, with my husband, Mark.   I think we can do it for $3,000.  Mark gets paid twice a month—so over the course of the year, he’ll get 24 paychecks.


(Yes, I’m using his paycheck for this example.  I’m self employed.  If I’m thinking about buying something with my own money I use “How many tax returns to I have to prepare to go to Disney World?”  But I don’t have withholding—I have to pay estimated taxes so this program will not work for me.)


So to save up $3,000 first we’ll have to figure out how much of a refund we’ve got coming (or how much we’ll owe) if we don’t make any adjustments.  So how do you figure that out?  You use the IRS withholding calculator.  Here’s a link:,,id=14806,00.html


You’ll want to have a copy of your latest pay stub and your last tax return with you when you do it.  Just go to the site, answer the questions, and it will tell you what your expected refund (or what you’ll owe) will be.


I did this back in February and it looks like we can expect a refund of just about $1,000 next year.  We will need to save another $2,000 for our Disney vacation.  Since we did this in February, that gave us 10 months to save up.  Let’s do the math:

10 months times 2 paychecks per month = 20 paychecks

$2,000 divided by 20 paychecks = $100 per paycheck


So for us to have adequate savings for Disney World, Mark would need to withhold an additional $100 per paycheck to give us a $3,000 income tax refund.


If you want to change your withholding, you’ll need to go to your human resources department and complete a new W4 form.  If you know exactly how much extra money you want to save, just put that dollar amount on line 6 of your W4:


If you’re just interested in getting a bigger refund, but don’t know who much extra you want to save, you can change the number of allowances you’re claiming on line 5.  For example, if you’re currently claiming 3 exemptions and your refund is very small, change your withholding to 2 exemptions and your refund will be larger (assuming that everything else on your tax return stays the same.)


Realize that if you do this, you will have less money to spend from every paycheck.  What you’re doing is making a trade off.  Money later versus money now.


I’m going to be perfectly honest with you—most tax professionals would never, NEVER, recommend saving money by letting the IRS hold it for you.  Two reasons:  the first argument is that you can save the money yourself and earn interest on it in a savings account.  My answer to that is—the interest rate on my savings account right now is .2491%.   If I had the whole $3,000 in the bank for the whole year, I would earn $7.47.  I think actually being able to save $3,000 is worth that price.  This isn’t such a good argument these days.


The second issue is a little more serious:  If the IRS is holding your money—you cannot access it until you file your tax return next year.  If you have a financial emergency, there’s no way for you to get your hands on that cash.  It’s important that you understand that.  The whole point in having the IRS hold your money is so that you can’t spend it, it’s a good idea to have a little savings cushion—but this is a strategy for people who aren’t good at saving, so there’s a bit of a catch 22.


Like I said, this strategy isn’t for everyone—but there are lots of people who use it and they use it successfully if saving money is a problem for you.

Tax Tips for Newlyweds

tax tips for newlyweds

Danielle and Jeremy

Updated for 2013

Congratulations on getting married!  It’s so fun to start out your new life together, but it’s a big adjustment too.  One of those really difficult adjustments is learning a new phrase, “Our money.”  You already know “your” money and “my” money, but the whole “our” money concept is a little difficult to grasp sometimes.  Hopefully, this will help with the tax side of that at least.

Pick the right filing status:   It doesn’t matter how long you’ve been married for, if you were married on December 31st you are considered married for tax filing purposes.  For most couples, your best bet is to choose the Married Filing Jointly tax status, it will usually give you the best tax rate.   There are times though, when it may make sense to use the married filing separately status.  For example:  if one of you has an income tax problem from before the marriage, it might make sense to file separately until the tax issue is cleared up.  Many accountants will tell you to just file jointly and file an injured spouse claim.  I often recommend that too.  But if filing separately isn’t going to hurt your taxes very much, I prefer keeping your tax matters completely separated until the old tax issues are erased.  It’s just a safety precaution.  When you file separately, you know exactly what money you’ll get back from the IRS, when you file as injured spouse, the IRS makes the determination.  I prefer keeping the control.

Now that you’re married, you cannot claim the Head of Household filing status. This is a common problem that I see with tax returns all the time.  Couples who have been together for years and have a couple of kids decide to get married.  They forget to change their filing status on their tax forms after they get married.  Oops.  Not only is it a mistake, but if you received benefits that you wouldn’t have gotten if you filed as married, then it’s considered income tax fraud.  Don’t fall into that trap.  Be sure to use one of the married filing statuses.  (If the marriage goes belly up and you separate for the last 6 months of the year, then you might be able to file as HH, but this is the newlywed page.)

The good, the bad, and the ugly:  The good part about married filing jointly is that you double your exemption and your standard deduction.  Also, your tax rate is lowered.  If you’re a newlywed and one of you is the wage earner and the other had little or no income, you’re going to have a great tax year.

The bad part is that with most young married couples today, both spouses are working.  Your deductions may go up but really you’re just combining your two incomes so you really get no major tax break at all for being married.

Now here’s the ugly:  For some couples getting married actually puts them in a worse tax situation than when they were single.  For example, let’s day that Danielle and Jeremy were both in the 15% tax bracket when they were single, but combining their incomes puts them in the 25% tax bracket.  If they didn’t make adjustments to their withholding, they could get hit with a nasty little tax bill in April.

Here are some other issues that you might not have thought about yet.  First to the bride, did you change your name?  If so, did you make it official with social security yet?  If yes, then you’ll be able to file your tax return with your new name.  If not, make sure that you use your old name to e-file your tax return. If you don’t use the name that the social security office has on record for you, your tax return will be rejected.

The stupid question:  Whose name is going to go on the top of the form?  I warned you it was a stupid question.  Does it matter?  No.  What does matter is that the name that’s on the top of the form will stay there.  Some couples, especially if they have equal incomes, will change which name goes on top each year, seems fair doesn’t it?  What they don’t realize is that the IRS looks at that as an attempt to cover up fraudulent activity.  Generally, put the higher wage-earner’s name on top of the form and leave it there, even if your incomes change later.

Hopefully, you’re getting a refund.  Aside from those wedding gift checks, this will be the first “joint” money you receive.  That’s kind of cool.  Do you have a joint bank account yet?  The money will be in both of your names, so both of you should be named on the checking account for the money to be direct deposited.  One thing you should know, although the IRS will direct deposit your tax refund into a single account of a married couple, some states and financial institutions won’t allow it.  If your refund seems to have gotten held up, that could be the reason.

One last piece of advice:  If you are getting a refund this year, it’s a great way to start putting away some money into savings.  I know you’ve got bills to pay and things you want to buy, but saving now while you’re just starting out is the best thing you can possibly do for yourself.  Allocate some money for spending, but get that savings cushion started and keep adding to it.  You’ll be glad you did.

I just saw a news item on television:  Couples with $10,000 of debt and zero savings are twice as likely to get a divorce as couples with $10,000 in savings and zero debt.  The best thing you can do for your marriage is to have a little padding in that savings account.  (End of mom-style lecture.)