Please note that the information below is outdated, as of Jan 1, 2020. I have some general advice about the new version of the W-4 here.
How should you fill out your W-4? I don’t know. Really.
I assume the W-4 was originally intended to be helpful, to make sure that workers had enough withheld from their paychecks so that they didn’t face a big tax bill at tax time. But these days, it’s hard to see it as anything other than an inscrutable mess. Separate worksheets for “personal allowances”, deductions, additional income, two-earner households, multiple jobs, …? Yikes.
I’m not exaggerating in the slightest when I say that completing a W-4 ‘correctly’ is more difficult than completing your annual tax return. Here’s why:
- There’s no consensus on what ‘correctly’ even means. What are you shooting for? What’s “enough” withholding? Is your goal to owe nothing at tax time? Get a small refund? Owe as much as possible without triggering penalties, so that you’re not giving the IRS an interest-free loan? Get a large refund, by effectively using the IRS as a forced savings account? Will you be disappointed if your refund is lower than expected?
- Even if you know what you’re shooting for, it’s extremely difficult to make an accurate shot. Do you have complete records of your income, deductions, and withholding year-to-date? Do you know what the rest of the year holds for you, in terms of job changes, raises, pay cuts, layoffs, windfalls, children, childcare, home purchases, home sales, and so on?
So when a client asks me “What should I be claiming on my W-4?”, or “Am I having enough withheld?”, or anything along those lines, here’s what I say:
- Don’t expect the W-4 system to ‘work’. It doesn’t. If it does work for you, you’ve either gotten lucky, or you have a very simple tax situation.
- If you want minimal risk of owing at tax time, you don’t expect any cash flow issues during the year, and you don’t mind the idea of possibly getting a large refund, then ignore everything on the form and just claim “Single” with zero allowances. But know that this is no way guarantees a refund, especially if you have more than one job, or if you have other sources of taxable income.
- Don’t claim “Married” on your W-4 unless your spouse has no income. Claim either “Single” or “Married, but withhold at the higher single rate”. (Claiming “Married” causes a steep reduction in the amount of taxes withheld from your paycheck, on the assumption that your spouse doesn’t work and therefore your overall tax situation will be more favorable.)
If you want or need something more precise than that, then spend half an hour or so working through all the questions at the IRS calculator here. However, don’t expect it to also work for Oregon tax withholding, because (surprise, surprise!) Oregon’s system varies significantly from the IRS’s.
Repeat every Jan 1, and any time there’s a significant change to your financial situation.
That’s really the best I can do! Unless, of course, you want to pay me to work through everything for you, which will likely end up costing more than your annual tax preparation fee. Whatever answer I give you will cease to apply as soon as anything about your financial situation changes. … I’m sure you can tell that I’m not excited about this option.