Now is a great time to review your W-4. Why? Because we just reviewed ours and are now reminding you, that’s why.
When you start a new job, you are thrown a lot of paperwork. In that pile is a little form called a W-4; a daunting, boring, typically-tiny-fonted government form. Most people will fill it out to the best of their knowledge, hope they haven’t done anything illegal, and forget about it. Come tax time, many of these people are either completely shocked when they owe money, or totally stoked that they are getting a huge refund. You should aim to be neither. Rather than crossing your fingers and hoping for the best, wouldn’t it be nice to know exactly what to expect? Filling out your W-4 properly can help you achieve this goal of greatness.
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We all must pay our taxes to The Man, whether you pay them now or later is determined by how you fill out your W-4. There are three schools of thought in this area:
1. Pay the most amount of taxes (claim 0 withholding allowances) possible out of each paycheck and get a big refund with your tax return at the end of the year.
- Any tax refund means that you gave the government too much of your money. You gave them a loan and they aren’t going to pay anything (interest) for the use of your money. Lame.
- Some people use this method as a way to force themselves to save. Surely, you can find a savings account that pays more interest than the 0% the government will give you. Also, talk to your employer to see if they offer any sort of 401k matching program.
2. Pay just the right amount of taxes out of each paycheck (claim an allowance for you, your spouse (if they don’t work), and each of your dependents) and get no refund with your tax return.
- If you and your spouse are both working, make sure that your total personal allowances only equal 2. That’s 1 for you, 1 for your spouse: 1+1=2. Divide up the kiddos accordingly. I know a few couples who have gotten burned by this, one person claiming both of them, the other claiming themselves. Claim too many allowances and you’ll end up with a #3 situation.
- If you are single or are married but there is only one working spouse, you’ll notice that on line B you get the option to take a little “bonus” allowance! It’s very exciting.
3. Pay the least amount of taxes possible out of each paycheck (claim more allowances than you actually have dependents) and pay your taxes with your tax return.
- For those of you who aren’t too familiar with finance, I’ll keep this short. The present value of money is always worth more than the future value of money. Some people who choose method #3 take advantage of this concept.
- Income tax is pay-as-you-go, or pay as you receive income. If you owe too much money with your tax return, you will also pay penalty. Penalties can outweigh the value gained, so be careful.
Here are a couple of resources to get you started. Take all of 10 minutes to save yourself some trouble come tax time.
Find anything funky on your W-4?
Get together with your accountant and the two of you can get down to business.
Article publié pour la première fois le 14/07/2010