Advanced W-4 Tax Planning Methods

Withholding taxes are very important to the federal government. Payroll taxes account for over a third of all federal revenue.

These taxes are even more important to American families. Many families do not prepay estimated taxes. Since they only pay withholding taxes, a good W-4 withholding plan is essential. Otherwise, a family could have a very big tax refund or a very big tax bill in the spring. Typically, it’s a good idea to avoid either outcome and work toward tax balance (no refund and no bill).

A certified tax coach can shed some additional light on the W-4 tax planning methods discussed below. This form tells employers how much money to withhold for income taxes. The information this form contains is largely up to the individual taxpayer.

Tax Planning Basics

Filing status and number of allowances in Sections 3 and 5 are the most prominent tax planning tools in the W-4. And, they are also the easiest ones to use.

Generally, married people pay lower taxes than single people. On the 1040, filing status must match legal status. Married people cannot claim they are single. But on the W-4, taxpayers may claim either status, regardless of their legal status.

As for allowances, the more you claim, the more take-home pay you have. So, a high number of allowances is good for a monthly budget, but it may result in tax liability. There is some flexibility here as well. Taxpayers cannot over-claim allowances, but they can under-claim them. If Joe and Mary have three children, Joe may claim up to five allowances at work (one for himself, one for Mary, and one for each child). He can claim fewer than five allowances if he wants, and thereby adjust his withholding amount.

W-4 Tax Planning, Part II

Section 6 is the manual withholding option. A little additional withholding makes a big difference. If the checks come twice a month, $50 extra could mean an extra $1,200 at the end of the year. That money could mean a larger refund in April, or it could offset tax liability in other areas. More on that below.

Bear in mind that employees can amend their W-4s at any time. So, if you try one withholding strategy, and it does not work out, you are not locked into it for the rest of the year.

In many cases, tax withholding does not occur in a vacuum. Many families own homes, receive alimony payments, freelance on the side, and/or collect non-employment income. All these things could affect tax liability. Withholding adjustment is an easy way to account for these things.