Understanding your W-4

Whether workers received a surprise tax bill this last filing season or a hefty refund, a large factor in their tax liability revolves around their W-4 form. Most people are familiar with W-2s and 1099s because they receive these forms from employers, lenders, service providers, banks and other entities when it's time to complete their income tax returns. However, W-4s are typically only seen when workers begin a new job and are required by their employer to fill out the document. Understanding the W-4 and how it impacts a worker's taxes can help them make crucial decisions when they begin a new job, or make adjustments to the form when they undergo a life change. 

A W-4 is a worker's Employee's Withholding Allowance Certificate, and allows employees to detail how many exemptions to claim. The number of exemptions individuals claim will directly impact how much of their earnings are withheld from their paychecks each cycle for tax purposes. Claiming the correct number of exemptions is crucial, not only because it will influence a worker's take-home pay, but also because it will influence whether they receive a refund in April or owe a bill to the Internal Revenue Service. More specifically, those who claim too many exemptions will receive a higher paycheck each pay period, but may carry a large tax liability at year end. In contrast, individuals who claim too few exemptions will receive a smaller paycheck, but may also obtain a substantial refund from the IRS.

Adjusting your withholding
No person enjoys paying Uncle Sam when tax season rolls around, but most people enjoy receiving a large refund. There can be pros and cons to the latter, and individuals should consider them and determine if they want to adjust their withholding. On the one hand, many workers take the "forced savings" approach, and prefer to get a substantial amount back each year. The refund may serve as a cash windfall to put into savings, take a vacation, splurge on a purchase or pay down debt. However, others take the view that they have essentially given Uncle Sam free use of their tax money throughout the year, which they could have used for themselves in the form of a larger paycheck.

Depending on a person's financial situation and goals, they may consider adjusting their withholding to even out their tax liability. In addition, workers should also consider making adjustments to their withholding when undergoing life changes, such as a marriage, divorce, birth or death. 

For a more in-depth look at Liberty Tax Services, visit the Give Me Liberty! Magazine. Follow Liberty Tax on Facebook and on Twitter or contact Liberty Tax directly at 1-877-at-Liberty.

Posted To: Tax Ranger's Blog By: Tax Ranger On: Wednesday, June 12, 2013
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