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How to Hack your W-4 Form and Win at Taxes

Your first day of work is nerve-wracking. You have to find the coffee machine; figure out where you're sitting at lunch; and on top of it all, fill out all the "new hire" forms. You're not alone, everyone hates those damn HR forms, but there is some upside. Part of new job on-boarding means you get to participate in the various benefits provided by your employer. There's the retirement plan (hopefully with a match!!), medical benefits, commuter benefits, and various others. Another form that they'll throw at you is the IRS tax withholding form, also known as the W-4. You probably don't remember filling it out, but it's likely you listed your name, social security number, filled in a 0, 1 or 2 under allowances and then signed it and never thought about it again. 

We're about to tell you why you may want to revisit this form and how it may save you from owing money at tax time.

What's an allowance?

The whole 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 much tax dollars are withheld from your paycheck. The higher the number you list, the fewer the tax dollars that are deducted from your paycheck. At first glance, it seems like you might as well list the highest number allowed, but the downside is that if you don't pay enough in taxes throughout the year, you'll owe come April.

Let it be known 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

Why Single:

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 spouses 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 does not know your spouses income, they inevitably wind up withholding incorrectly.


Why Zero:

For higher earners, exemptions on tax returns are phased out. The IRS also limits high earners on itemizing deductions.   Lower earners usually do not itemize their taxes or have any exemptions other then themselves and spouse (which the tax tables already account for).  Putting 1 exemption means you have a dependent and are a lower earner. Putting more then 1 means you have large itemized deductions (mortgage interest, real estate taxes) which most lower earners typically do not have.   


One last thing to note: this is not a rule for everyone.  Stash clients get specialized analysis to help adjust their withholding and deductions to make sure they don't owe extra tax in April but also don't miss out on money in their paychecks throughout the year.  But use our general advice above if you feel lost about your W-4 and want a good starting strategy!