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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 the forms. Those damn HR forms. But 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 much tax dollars are withheld from your paycheck. The higher the number your 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:

If a married couple and both individuals work the employer does not know the other spouse works and withholds incorrectly.

As an example:

Husband salary = $150,000
Wife Salary = $150,000

If either one puts married, then the tax tables used by the payroll company will assume the total household income is $150,000 using the married tax table and withhold accordingly.   They will not assume that the total household income is anymore then $150,000. When the total household income is $300,000, the tax tables are much different and each spouse will be underwitheld based upon their combined household income of $300,000.

Why Zero:

For higher earners, exemptions on the tax returns are phased out, so are itemized deductions.   For lower earners they usually do not itemize 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!