April 15, 2015
When filling out a W-4 at work, what should you consider prior to filling out the form?
When filling out a W-4 at work, what should you consider prior to filling out the form?
Prior to fillong out your W-4, you should determine what level of taxes withheld will be right for you. You should shoot for a level where, at the end of the year, you either break even or owe a little bit of tax money. You can then use the extra money you are getting with each paycheck to invest in something and earn returns off of it. While the large refunds may seem nice at the end of the year, you should realize that they will be counted as income for the following year and so will be taxed again.
You should know how much you want held out of your pay for taxes. The number of withholding does not mean anything besides the amount you want out. It doesn’t mean the number of dependents you have like many believe. You should put the number that is right for you.
Consider the amount of allowances that is right for you. Choosing a lesser amount of allowances means more will be taken out of your check to cover taxes which typically results in a higher return at the end of the year. More allowances means less is taken out of your check and you can either break even by having just enough taken out to cover taxes and the rest goes into your check making it bigger, or you may end up not paying enough and run into having to pay in to taxes at the end of the year.
The best option is up to the individual but the smarter option would be to pay the necessary tax and not extra. That extra money in your pay check should go into your savings, which would be smart to invest so that your money starts compounding interest and making YOU money instead of giving the government an interest free loan.
Knowing the number of allowances is important…otherwise you will end up listening to people who know nothing about what those numbers mean and tell you (like Garrett said) that those numbers mean your dependents and that you should put X or X amount. Make your own decision.
Well said everyone. Let’s recap.
(1) When filling out a W-4, you want to consider how many dependents you have (including yourself), how many deductions, and how many credits. Consider all of these issues before identifying the number of allowances you will use to withdraw taxes on a monthly basis.
(2) The smaller the number (with 0 being the smallest), the more tax that is withheld. The bigger the number (9 is generally as big as you can go), the less tax is withheld.
(3) It is wise to break even or owe money instead of getting a big fat tax refund. Giving the government your money all year and then getting it back with no interest makes no sense. Turn the tables and raise your allowances on your W-4 and turn the trick on them. Break even or owe, and then use that extra money per month in your paycheck to pay down debt and/or increase savings and investments. Financial freedom may follow!