Taking Control of Your Taxes – Topic #31 – Amazing W-4 Form – Take more money home

Filed in Gather Money Essential by on February 10, 2011 0 Comments

According to USA Today, “Through March 12, 2010, the average tax refund was a record $3,036, up $266 from the same period a year earlier.” So this means that average tax payer is lending the government more than $3,000 a year interest free! Yesterday, I talked to a client who will be receiving more than $8,000 in income tax refund this year.  He said, “I wished I had the use of this $8,000 back in 2010.”

So I showed him that by changing his W-4, he can take home $600 more each month starting this month.

The only way you can take home more of your own money is to print this W-4 form from IRS, and submit the signed request to your payroll department TODAY!  You can do this as many times during the year – but I recommend that you don’t do this more than twice a year (in January and in October), simply to reduce confusion.  If you are married, and your wife works, have the higher income spouse make a W-4 change.

If you want to keep $250 a month to take home (or $3,000 a year), you can request the following changes in allowance on your W-4 form, depending on your family income tax bracket:

Tax bracket for Single filer (using standard deduction)

  • Tax rate Gross income . . . Change W-4 allowance by
  • 10% . . . $  9,350 – $17,724 . . … 8
  • 15% . . . $17,725 – $43,350 . . … 5
  • 25% . . . $43,351 – $91,750 . . … 3

Tax bracket for Married filer w/2 minor children (using standard deduction)

  • Tax rate Gross income . . . Change W-4 allowance by
  • 10%. . . . $26,000 – $42,750 . . . . 8
  • 15%. . . . $42,751 – $94,000 . . . . 5
  • 25%. . . . $94,001 – $163,300 . . . 3

Example: If you earn gross income of $50,000, and claim “Married – allowance 2″ now and want to take home $250 more each month, then add 5 to your allowance by claiming “Married – allowance 7″ immediately.

Many tax filers mistakenly believe that ALLOWANCE equals the number of DEPENDENTS. This is a false notion.  You can decide how much to withhold, and as long as you don’t pay penalty, you can claim higher (or lower) allowance number on your W-4 form.  Be aware that if both spouses work, they may need to withhold more payroll tax as their total gross income is pushed into higher tax bracket.

Remember that your refund next year will be reduced by the amount you keep in your pocket, you should use the extra money wisely.  Examples of wise use of extra money include:

  • Paying down debts (credit card, student loan, HELOC, revolving charge, etc.)
  • Building up emergency fund (keep 3 to 6 months in expenses)
  • Build up future funds (add to 401(k) (smart move), IRA, college fund, etc.)
  • Saving (for car purchase, vacation, gift, etc.)

If you feel uncomfortable with the new take-home, you can always file another W-4 with your payroll, and change it back to a different allowance anytime you choose.  Likewise, change your allowance if your gross income increases due to:

  • 1099-Misc, 2nd job, etc.
  • Withdrawal of IRA / Cashing in 401(k)
  • Selling of profitable stocks or mutual funds

Don’t let Uncle Sam keep your hard earned dollars – use it to improve your financial life now!  Check SINGLE or MARRIED in Box 3, and choose ALLOWANCE in Box 5.  Your name, address, SS#, date and a signature are all you need on the W-4 form.  Take the form to your payroll office, and wait about two weeks for a bigger paycheck.

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