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How to Fill out Your W-4?

You've most likely filled out at least W-4 forms in your life. The W-4 is the form that employers use to determine how much in taxes should be withheld from your paycheck. You usually get it when you start a new job.

Tips to keep in mind:

  • Strive to be accurate. You may face a $500 penalty if you end up having too little tax withheld.
  • On the form, you claim exemptions for yourself, your spouse, and any dependents The more you claim, the less is withheld. You can also claim allowances for certain deductions or credits such as the Earned Income Credit, IRA contributions and deductions, alimony deductions, the dependent care credit and the credit for the elderly or totally disabled. If you don't file this form with your employer; the employer will have to withhold taxes at the highest rate.
  • You should fill out a new W-4 form whenever the number of your exemptions changes or whenever your withholding allowances increase or decrease. Times when you should consider amending your W-4 are when your marital status changes, when you have or adopt a child when a child spreads his or her wings and is no longer a dependent, or when your deductible expenses change (such as when you buy a house). In some cases, you need to file a new W-4 within 10 days.
  • If you're getting married, pay particularly close attention to your withholdings. You may be assuming that when you get married you'll pay less in taxes. If you and your spouse both work, that's likely not the case. Read up on the marriage penalty.
  • You don't have to claim all the exemptions available to you. The more you claim, the less will be withheld. But depending on your situation, this might leave you at the end of the year with too little having been withheld and therefore facing a penalty of some sort. If you're a careful tax planner, you'll estimate how much you expect to owe in taxes for the year and will ensure that at least 90% of that is being withheld. As a margin of safety, you might shoot for 100% but if you notice that 140% of your anticipated tax liability is being withheld, consider tweaking your W-4.
  • You should be able to resubmit a new W-4 form to your employer at any time during the year. It's not something that can only be submitted once or only changed after a major life event.
  • Use the W-4 as a tool. For example, if you expect to sell some significantly appreciated stock during the year and think your total tax due this year will be substantial, consider having more money withheld from your paychecks. This can help you avoid having to pay estimated taxes throughout the year.
  • When employers give you the W-4 form to sign, insist that you keep the whole page, not just the bottom half, so that you may read all about what you're doing.