The “quick and dirty” explanation of your W-4

Once again, we made it out of tax season alive and well! I had hoped to keep blogging  during tax season, but time got away from me, and here we are, May 1st, with our next little blurb from your favorite CPA’s.

A recurring issue that seems to come up at least a handful of times each tax season is the issue of your W-4. The short version is this: W-4’s can be confusing. You have to fill it out (at minimum) each time you start a new job– pick a number 0-9, and check a box for your tax status. Your employer then withholds your income taxes during the year, and at the end of the year, you file your taxes and get your refund of whatever was overpaid. Sounds simple, right? Well it is, in theory at least. In practice, like much of the tax law, it can get complicated very quickly.

One of the more popular questions we get about W-4’s is this: “We got/are getting married this year. How should we change our W-4?” Sounds easy enough, right? Not really. This answer is heavily dependent on a number of factors. Do you want a refund? Or do you prefer breaking even with the IRS, or maybe even owing them a little (why this is good, we’ll discuss in another post)? Who will be earning more? How precise do you want your number to be? The shortest, and quickest answer we can give you is this: Single 0 for both of you will net you a refund (barring any other huge items on your tax return). If you want to be able to keep some of your money during the year, instead of taking one huge check from Uncle Sam in February, then the simplest answer we can tell you is to again, each put “single”, or “married but withhold at higher single rate”, and whoever earns more changes their withholding number. So, if your spouse works part-time throughout the year and you are the breadwinner, you would be the one to adjust the number from 0, up to 2 (or more, depending on what other instances affect your taxes).

All too often, we don’t get this question until its too late, and we are preparing your tax return for the year prior. “Well, we got married this year, and we changed our W-4 like we should have, why do we owe? This doesn’t make any sense!” Let’s take a minute to try and break it down.

The tax code has different tax tables that are used for different filing status’s. Further, you get deductions right off the top of your income (deductions are good, don’t worry). Finally, W-4’s marital status means something different than what it means on your taxes. I’ll try to explain. What is happening when you choose “married” on the W-4 instead of “married but withhold at higher single rate” or just “single”, is not are taxes being withheld according to the incorrect table, but your employer is also calculating your withholding on having the deduction of your spouse in your earnings. So to explain simply,  if both of you are working and you both claim “married” on your w-4, what has happened is not only are you using different tax tables to calculate your withholding, but both of you are using the deduction for the other person! What happens then is not enough withholding is paid in for you throughout the year, and when you go to file your taxes, surprise! you owe.

This is one of the many areas in taxes and personal finance where there isn’t a blanket answer for everyone. Like I said previously, there are so many different variables as well as preferences that could alter your W-4. Give us a call today, we’d be happy to review your situation and make recommendations accordingly!