Filing a W-4 form
taxes affect you as soon as you're born, most of us don't even start thinking
about them until the momentous day when we get our first paycheck. That's when
we come to the distressing realization that we don't get to take home all the
money we've worked so hard for. Uncle Sam is getting a piece of it, and sometimes
it seems like it's a very big chunk of change.
This is because of something called payroll withholding, which
is basically pay-as-you-earn taxation. While the IRS trusts us to file our taxes
accurately and on time, the U.S. Treasury finds it easier to pay for federal
programs if it gets some of the money before April each year. So taxes are taken
out of your wages before you receive the money, deposited in an IRS account
and credited to you when you file your return.
Meet your W-4: You can't get around withholding, but you
do have some control over the amount. The easiest way to manage how much tax
is withheld is through the information you provide on one of the first forms
your boss gave you: the W-4.
The W-4 asks you to enter the number of allowances you want to
claim. This number is what your employer uses to calculate the amount of income
tax to withhold. An allowance represents, in large part, how many people depend
on your income. Usually, you claim one allowance each for yourself, your spouse
and each of your dependents.
You're in control: However, you can adjust the number of
allowances for your situation to avoid having too much or not enough tax withheld.
For example, if you have a lot of deductions -- several kids and big mortgage
interest payment each month -- these factors will reduce your final tax bill,
so you may want to claim more allowances on your W-4 to cut the withholding
taken from your pay and hang on to more of your money now.
If you figure your allowances correctly, when you file your return
in April you should neither owe a great deal in taxes nor get back a lot through
a refund. While some folks like getting a big refund, that strategy is not necessarily
to your advantage. That extra money you send to the government is, in essence,
an interest-free loan from you to Uncle Sam. You might want to consider taking
that extra cash from reduced withholding and putting it into a savings account
where it can earn more money for you. Of course, that creates a different tax
consideration, but that's another story.
-- Posted: April 6, 2004