To With-hold or Not to With-hold?

I have found, in my time as a tax preparer, that a large number of taxpayers don't recognize the term "W-4". When I ask, "What do you claim on your W-4?" Most people think that I am talking about their W-2 and reply, "I don't know? I just let the IRS figure it out".

The IRS form W-4 (Employee's With-holding Allowance Certificate) is used by employers, to inform the IRS how much to withhold from your pay. Once I explain that, they know exactly what I am talking about.

Unfortunately however, most taxpayers don't know what they are claiming. If you are single without dependents, and you want a larger refund, you should absolutely, positively and most definitely claim zero. (A large number of taxpayers don't even realize they can claim zero) And if it's within your budget, there is a little Grey area near the bottom labeled, "Extra to be With-held".

In this box, you can indicate how much "extra" you would like the IRS to with-hold each pay period. This is like setting up an interest free savings account with the IRS that goes towards your taxes paid. And every bit of this amount that exceeds your taxes paid, comes back to you at the end of the year. It also helps to cover higher tax percentages that come with increased Income.

Generally, when you claim zero, the IRS takes 15% of your income each pay period. Claiming one is 10% and two is 5%. I'm pretty sure 5% is the lowest they take, so claiming three or higher doesn't affect the with-holding amount. In effect, if you need more money during the year, claim a higher number and if you don't necessarily need it, claim a lower number.

You have to go through your employer to examine or change your W-4 and if you just started your job last year, the IRS may have with-held too much or not enough. Your employer may be able to work with you as a part year employee to help with either over or under with-holding of taxes throughout the year. Over payment means you will get a bigger refund or maybe even lower your taxes due, so it might not be a bad idea to leave the W-4 as it is.