Your first day of work can be nerve-wracking.
You have to find the coffee machine, figure out where you’re sitting at lunch, and fill out a bunch of forms. Stressful, we know. But one of those forms might have a bigger impact than you think. That’s the IRS tax withholding form, also known as the W-4. You may not remember filling it out, but it’s likely you listed your name and Social Security number, filled in a 0, 1, or 2 under allowances, and then signed it and never thought about it again.
We’re here to tell you why you may want to revisit this form and how it can save you from owing money at tax time.
What’s an allowance?
The purpose of the W-4 is for you to indicate the number of allowances you’d like to claim. This number (usually between 0-7) is what determines how many tax dollars are withheld from your paycheck. The higher the number you list, the fewer tax dollars that are deducted from your paycheck. You’re probably thinking you should enter the highest number allowed, right?
Not so fast. If you don’t pay enough in taxes throughout the year, you’ll owe come April.
There are TONS of schools of thought around how to optimize this number so that you neither owe or are owed at tax time. Our opinion, coupled with that of Stash’s resident tax expert, Rich, is slightly different.
We say: 95% of the time, it’s in your best interest to claim 0 and single.
Rich helps us break this down.
Tell ’em you’re single, even if you’re not.
Rich: Say you’re a married couple and both of you work for companies. Each of you make $70,000. The employer has no information on your spouse’s income, so they tax you as if your “household income” is $70,000 a year, which would put you in the 15% tax bracket. However, when you go to file your taxes, your household income is actually $140,000, putting you in the 25% bracket. Since your employer doesn’t know your spouse’s income, they inevitably wind up withholding incorrectly.
Rich: For higher earners, exemptions on tax returns are phased out. The IRS also limits high earners on itemizing deductions. Lower earners don’t usually itemize their taxes or have any exemptions other than themselves and their spouse (which the tax tables already account for). Putting 1 exemption means you have a dependent and are a lower earner. Putting more than 1 means you have large itemized deductions (mortgage interest, real estate taxes) which most lower earners typically don’t have.
One last thing to note—this rule is general advice only. It’s a good starting point if you’re totally lost on what to put on your W-4. If you want more personalized guidance, consider talking to an expert. As a Stash client, you’ll get a specialized analysis to ensure you get the most out of each paycheck, without a surprise tax bill come April.
For the latest on the new tax bill, click here.