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More Money In Your Pocket


July 10, 2008


Millions of Americans are giving the IRS an interest free loan each year.

How?  By the way they determine their exemptions and deductions on their Form W4

What’s a W4?  Most folks don’t even realize that a W4 is the form the IRS requires (and a variation is required by most states) in order to determine how much tax should be withheld from your income each pay cycle and sent to Uncle Sam and the state. 

You complete Form W4 when you are initially hired by a company; but then you never see it again.  And here’s where most folks give away money.  Changes occur in everyone’s life, and those changes can impact your tax liability.  Let’s take Bill for example:

Bill started his first “real” job right out of college.  He was hired by a major corporation and he intended to stay with them for a long time. When Bill was first hired, he completed a W4, stating that he was single with no dependents.  His federal taxes were held at the higher single rate. 

After three years of employment, Bill married Denise.  Bill never changed his W4 to show that he now had a dependent exemption, so he was still having taxes withheld at the higher single rate.  Denise also didn’t change her W4, so her taxes were also being withheld at the higher single rate.  They got an enormous refund from the IRS after their first year as a married couple.  Sounds great, right?  Wrong.  Because while they were having their money held by Uncle Sam, they could instead have been investing that extra money in their company sponsored 401(k).  And it could have been earning interest (remember, the IRS doesn’t pay interest on the money you “deposit” with them).  So, they’ve lost money, even if they invest their refund.

Three years later, Bill and Denise give birth to their first child.  Still no changes to their W4.  Still getting a refund, but this year it’s even bigger!  They could have been investing that money for their child’s education.  This isn’t to say that Bill and Denise are struggling because of their “choice” to not change their W4.  They just could have used that money differently and possibly be better situated for the future..

Bob and Donna have a different situation.  Bob is self-employed and Donna works in a salaried job.  Donna’s W4 states that she is married, with two children, so she is taxed at a lower rate.  Each year, Bob and Donna owe money to the IRS.  Donna could change her W4 to show that she is single (or has fewer dependents).  Her employer would then deduct taxes at a higher rate. This would offset, and possibly eliminate, the taxes Bob owes from his self-employment.  It would also reduce the amount of penalty they pay each year for under-estimating their tax liability.

As your circumstances change, so should your W4.  Here’s a list of the various Personal and Financial Changes that might change your tax liability: 

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Lifestyle Change

Marriage; Divorce

Birth or adoption of child

Loss of an exemption

Purchase of a new home

Wage Income

You or your spouse start or stop working; OR

Start or stop a second job

Increased or Decreased

Income not subject to


Interest; Dividends; Capital  Gains

Self-employment income

IRA Distributions (including Roth IRA)

Increased or Decreased

Adjustments to Income

IRA Deduction

Student Loan Interest Deduction

Alimony Expense; Alimony Receipt

Increased or Decreased

Itemized Deductions or

Tax Credits

Medical Expenses; Taxes; Interest Expense

Gifts to Charity; Job Expenses

Education Credit; Child Tax Credit

The IRS has an online withholding calculator that can help determine your general tax liability and how to tax special circumstances income such as interest income, medical expenses, etc.  Confused?  Come to your local PRO-TAX office and we’ll be happy to help you!