Grad Guide: How To (Properly) Fill Out A W-4

I filled out what seemed to be my billionth W-4 when I became a Content Producer for AreaVoices six months ago. As naive as it, I completed the form as I have for the past eight years of my life, throwing in senseless numbers along the way, never knowing their real significance. Tax season 2015 rolled around and I got back a fraction of the maximum amount I was taxed all year long. I recalled what a former employee told me at 15, “Just fill in some ones and zeros, and you’ll be fine.” Was there more to be learned than that?

My eyes were suddenly wide open with terror. Have I really never been taught how to properly fill out a W-4? Were my friends making the same mistakes I was? Where was that lesson in high school?

It’s never too late to learn, so I asked Tyler Price, Tax Manager for Busek Olson & Associates, Inc., a.k.a. TaxMan.

I dreaded this meeting all morning long. I’ve never been an expert at finances… my brother was the saver, remember? Would this tax information even be comprehensible? As a former salutatorian, I usually have confidence in my intelligence, but that day I was on edge.

Luckily, when I walked in, it took one greeting smile from Price and my anxiety was washed away. The minute I started asking questions, I felt like I was talking to a knowledgeable friend, not an arrogant know-it-all like I had expected.

Here’s what I learned:

What is a W-4, Really?

A W-4 is an official Internal Revenue Service (IRS) form that communicates how much your employer should withhold from your paycheck for federal taxes. The overall goal is not to underpay or overpay for your taxes, causing you to owe money or have too much money taken out of your paycheck each month. The more allowances you claim, the less your employer will withhold from your paycheck each month.

W-4 JPEG Stroke

Filling Out the Form

Price and I started on page one of the Form W-4 (2015) under the “Personal Allowances Worksheet” section.

Line A

Enter “1” for yourself if no one else can claim you as dependent.

Price quickly explained that lines A and B would be the most important allowances to concentrate on for recent college graduates or those starting their first “real world” job.

Because each allowance line on the form is extremely situational and can vary greatly from person to person, Price said, “For all intents and purposes, the question then becomes, ‘Do you want to get a tax refund at the end of the year or do you want to get as much money as possible for each paycheck?’”

That means if you claim a “1” on line A, you are thereby claiming yourself as a dependant and you will get more money each paycheck, because the government will withhold less, and therefore you will get a smaller refund at the end of the tax year.

Claiming “0” means that the maximum amount of money will be withheld from your paycheck each period (essentially, you are overpaying the government) and your refund in the spring will be larger. Price said this is a good method for anyone who is bad at saving or likes to be surprised with a paycheck in the spring. “What’s your goal?,” he asked. If you need help saving for a travel fund or fun money, this might be the route for you.

Line B

Enter “1” if: 1) you are single and have only one job; or 2) You are married, have only one job, and your spouse does not work; or 3) Your wages from your second job or your spouse’s wages (or the total of both are $1,500 or less).

Again, the rule goes: the more allowances you claim, the less that gets taken out of your paycheck. Higher allowances also mean you may get less money back, or potentially owe money to the IRS at the end of the year.

Line B on the W-4 also has to do with your personal preference. Price warned that claiming two allowances—“1” on line A, and “1 on line B—may allow for only a small amount to be taken out of your paycheck each month, but at that rate you also risk owing money come April.

The following allowance lines (C-G), Price explained, are for other dependents you might claim on your tax form.

Line C

Enter “1” for your spouse. But, you may choose to enter “-0-” if you are married and have either a working spouse of more than one job. (Entering “-0-” may help you avoid having too little tax withheld.)

Line C is where you will have to start coordinating with your spouse. If you have a spouse that is working, depending on their income, you will enter a “1.” This means your employer will withhold a little less from your paycheck, because they will be withholding money from your spouse’s as well. You don’t have quite as much of a tax liability as you may if you are single.

Line D

Enter number of dependents (other than spouse or yourself) you will claim on your tax return.

This is an important section for dependents. For every dependent you claim, whether it be children or otherwise, you will get one exemption. In 2014, the exemption amount was $3,950 for each dependent. The total exemptions you have will be subtracted from your taxable income for the year. “What this is saying is that you have a certain number of dependents so you don’t have to withhold as much, because you are going to get that deduction on your tax return,” Price said.

For example: If you make an adjusted gross income of $30,000 for the year and have one dependent (totaling an exemption amount of $3,950), you will only be taxed based on $26,050.

Lines E-G

Price suggested that the taxpayer base what they claim on lines E-G on the previous year’s tax return. These lines aren’t always applicable for single students right out of college.

Lines F and G are where tax credits come into play. Because child or dependent care expenses and children themselves can be claimed when taxes are filed, the W-4 form accounts for this. The reason for that is so that more money isn’t taken out of your paycheck than necessary (being that these credits will be money subtracted from your taxes owed).

Line H

Add lines A through G and enter total here.

This is the sum of lines A-G. The more allowances you claim, the less that will be taken out of your paycheck each month, but the greater chance you have of being required to pay some money in at the end of the year.

Line 5

Total number of allowances you are claiming (from line H above or from the applicable worksheet on page 2)

Speaking in terms of basics, line 5 is the total number of allowances claimed from your “personal allowances worksheet” above (also found on line H). Price said that most graduates shouldn’t have to worry about the worksheets on page two.

Line 6

Additional amount, if any, you want withheld from each paycheck.

Line 6 is where a taxpayer is allowed to withhold more from each paycheck if they know they are going to have a higher tax liability (meaning they will owe more than what is being withheld from their paychecks).

Alternatively, this option can also be utilized to save money throughout the year. What you owe in taxes is subtracted from your withholdings, credits, etc., and you will get a check for the leftover amount.

Line 7

I claim exemption from withholding for 2015, and I certify that I meet both of the following conditions for exemption…

This line pertains to taxpayers who had money withheld from each paycheck in the last year and, in the end, got it all returned to them because their tax liability was zero.

“A good example may be a student in college,” Price said. “They make only make a few thousand dollars. With that, they are not going to have a tax liability.” Rather than paying in, just to get a check for that amount of money at the end of the year, you can claim tax exempt (if you foresee no tax liability in the coming year) and forego the process of filing taxes.

Vocab to Know

Adjusted Gross Income (AGI): AGI is the total income you receive from wages, salaries, dividends, and capital gains subtracted by any approved deductions. Your AGI is found at the bottom of the first page of the 1040 tax return. Deductions, exemptions, anything that can lower your adjusted gross income ultimately trickles down to your taxable income. A lower taxable income means lower taxes and potentially a bigger refund.

Allowance: Allowances are employee-claimed exemptions that are chosen on the W-4 and used to determine how much to subtract from your paycheck to remit to the tax authorities. The more allowances you claim, the less tax that is withheld from your paycheck.

Dependent: For claiming the dependency exemption, a dependent is either a 1) Qualifying child or 2) Qualifying relative.

1)    Qualifying Child

  • Be taxpayer’s child, stepchild, eligible foster child, brother, sister, stepbrother, stepsister, or descendant of any of them.
  • Be younger than the taxpayer and either under age 19 or a full-time student under age 24 or disabled.
  • Live with the taxpayer for more than half the year.
  • Not provide more than half of his/her own support.
  • Not file a joint return
  • Not be a qualifying child of another taxpayer

2)    Qualifying Relative

  • Not the taxpayer’s or anyone else’s qualifying child.
  • Either live with the taxpayer the entire year OR be related to the taxpayer.
  • Have gross income less than $3,950.

Exemption: Exemptions reduce taxable income. For 2014, each exemption was worth $3,950. The IRS allows you to claim exemptions for each dependent you claim, including yourself. Frequently, the source of these exemptions are the children who live with you for more than half the year, are under 19 years old (or under 24 if a full-time student), and who don’t provide more than half of their own financial support during the tax year. Some of your relatives can also qualify to be your dependents if they live with you.

Filing Status: Statuses can include: 1) single, 2) head of household, 3) married filing jointly—usually the recommendation for married couples, 4) married filing separately, or 5) qualifying widow(er) with dependent child. The filing status you claim determines which tax bracket you fall into, ultimately determining what you owe for taxes.

Head of Household: A person can claim head of household if they pass three tests, including the (1) Unmarried Test, the (2) Support Test, and the (3) Qualifying Person Test.  

To be considered unmarried, the person must be unmarried by the end of the year. To pass the support test, a taxpayer needs to prove they provide more than half the cost to keep up a home for a year. To pass the qualifying person test, you must live in the the taxpayer’s home for more than half of the year, and be a closely-related relative, such as a:

  • Child, stepchild, adopted child, foster child, brother or sister, or a descendant of one of these whom you claim as a dependent under the qualifying children rules
  • Child, stepchild, adopted child, foster child, brother or sister, or a descendant of one of these whom you would be eligible to claim as a dependent under the qualifying children rules, but choose not to claim as a dependent because you released the dependent’s exemption to the noncustodial parent
  • Mother or father who can be claimed as a dependent under the qualifying relative rules
  • Brother, sister, grandparent, niece, or nephew whom you can claim as a dependent under the qualifying relative rules.

Tax Credit: Tax credits, a.k.a. a “dollar-for-dollar offset to the amount of tax you owe” are given for child and dependent care, higher education costs, earned income of low-income taxpayers, etc. This credit gets subtracted from the total amount of tax you owe.

Withholding: The process of paying your federal taxes to the IRS as you earn income. Money is withheld from each paycheck and remitted to the IRS to cover your tax liability for the current year.

That’s a Wrap

Now that the terror has fled from my eyes, I feel confident in filling out my next W-4. I hope you do, too. Suddenly those ones and zeros have meaning and I feel powerful knowing what they represent. The next question is, do I want to utilize my W-4 as a savings account for spring or get the max amount on my paycheck? Aw, the madness continues.

Featured photo via blog.credit.com

3 Responses

  1. Under Line 5 you wrote “Price said that most graduates shouldn’t have to worry about the worksheets on page two.” When should we be worrying about this page, because I thought a husband and wife both working means this page needs to be filled out.

    Great post by the way. Thank you so much.

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