Tag: W4

Posted on by Jan Roberg

W4 for Dummies

W4 forms can be confusing. Get help here.

The single most popular blog post I ever wrote was about how to fill out your W4 form. Unfortunately, it’s all garbage now with the new tax rules. It’s time to take a new look at how to fill out that W4 form.

First thing to know is that the form is kind of funky. If you look at the 2019 form, well here, take a look: 2019 W4 Form



Being realistic, you might not want your employer to know all that stuff about you. Seriously, is it any of your boss’ business how much income you have outside of work? Or how much you donate to charity? The IRS is already aware that this form is a problem and they’re working on a new one. So far, it’s only a draft and it looks like this: 2020 W4 Form

What I’d like to see on these forms is an option to just withhold a straight percentage. I think that would be the easiest thing to do, but the IRS doesn’t listen to me so we’ll have to work with what we’ve got. Let’s start with the easy ones.

Students

If you are a high school or a college student, and you expect to earn less than $12,000 for the year, you’ll want to claim “exempt”. All you do is write “Exempt” on line 7 of the W4. Leave line 5 blank. Leave line 6 blank. You don’t fill out any of those other pages. Give your employer the first page and you’re done. Easy peasy!

Single People With Only One Job

Whether you’re paid a salary or by the hour, if you are single and working full time, you’re going to check the box that says single and claim one allowance on line 5. That one is also easy.

Married People Where Only One Person Works

If you’re married, and your spouse does not work, you will check the box that says you’re married, and you will claim 2 allowances on line 5. That’s it.

And that’s the end of the easy answers. Let’s look at the harder stuff.

Unmarried People with Children who Always Qualify for EIC

If you have children and in the past you’ve always qualifed for the Earned Income Tax Credit, unless you just got a big raise, you’ll probably still qualify for EIC. In that case, you don’t need a whole lot of withholding. You’re going to check the single box and claim 2 allowances for yourself, plus 4 more for every child you have under the age of 17. You might not have any federal withholding taken out of your check, but in the event that your income is high enough to require some withholding, you should be covered. It’s safer than claiming “exempt” in case you do have some federal tax liability.

Married People with Children who Always Qualify for EIC

It’s harder to qualify for EIC when you’re married because if both spouses work, the second income often kicks you over the limit. If only one spouse is working, check the married box and claim 2 allowances for you and your spouse together, plus 4 more for every child under the age of 17. Same as above.

If you both work, it’s a little trickier. Have the higher income spouse “married but withhold at the higher single rate” with one allowance, plus 4 allowances for each child under the age of 17. Have the lower income spouse claim “married, but withhold at the higher single rate” with 1 allowance. This should protect you in the event that the second income kicks you out of the EIC tax credit range.

Multiple Jobs, High Income Earners, and Working Spouses

The absolute best thing to do in this situation is to use the IRS withholding calculator. Here’s the link: IRS Withholding Calculator

Once you get to that page, you’re going to want to click on the blue box that says “Withholding Calculator”. You’re going to want to have your most recent tax return and most recent pay stubs with you when you do this. The IRS withholding calculator asks a lot of questions, (full disclosure, it’s kind of annoying) but it’s going to give you the most accurate results.

Good Grief, I Can’t Stand it! Is There Any Other Way?

Okay, this is my cheater trick. Did you owe last year? If not, you probably don’t need to change what you’re doing. If you did owe, don’t change your allowances, just add additional withholding to make up the difference in tax that you owed.

For example: let’s say that you claimed single with 2 allowances last year but you wound up owing an additional $1,000 in taxes for whatever reason. If you get paid every other week, that means you get 26 paychecks a year. You’d take $1,000 divided by 26, so you’d have an extra $38.46 taken out of each check.

Of course, if you’ve only got 14 pay periods left in the year, you might want to withhold more now and change it in January. Or you could set the rate now and just make an estimated tax payment to cover the difference. Do what works best for you.

I Still Need Help

I get it, this is confusing. Literally hundreds of people asked questions on the old blog post. I had to quit answering them. I just could’t keep up. I have my regular clients to attend to and it was overwhelming. If you still need help, contact your tax advisor. If you’re already paying someone to do your taxes, they should be able to help you with your W4, and they’re going to know so much more about you than I will.

If you don’t have a tax advisor, you can call my office and I can help you with this, but I’m going to charge you $200 to prepare your W4. I would need your most recent pay stubs and your latest tax return.

Posted on by Jan Roberg

Claiming Exemptions—the W-4 for Dummies

w4 for dummies

NOTE FOR 2018:   The Tax Cuts and Jobs Act that was recently passed by Congress is going to change the IRS withholding tables and how we fill out W4s.  Right now, we are still waiting for the IRS to supply the new withholding tables and create the new W4s.  This post is about the old W4.  I will be updating this as soon as I have new information.  But right now, the information below is for 2017 and earlier.  I do not expect the new information to be available until mid February.

-Jan

 

 

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

 

Spouse #2 with the lower paying job—claim MARRIED BUT WITHHOLD AT HIGHER SINGLE RATE, ZERO ALLOWANCES


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:  http://www.irs.gov/Individuals/IRS-Withholding-Calculator

Posted on by Jan Roberg

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:  http://www.irs.gov/individuals/page/0,,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:  http://www.irs.gov/pub/irs-pdf/fw4.pdf

 

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.