GET YOUR TAX WITHHOLDINGS RIGHT
Lori Z. Bahnmueller
Michigan Credit Union League - Your Money Matters
A W-4 is the form you fill out so your employer can withhold the correct amount of Federal income tax from your paycheck. Some states, including Michigan, offer their own W-4 to govern state withholdings. Essentially, it's a short form that can make a big difference. In 1996, for each allowance you claim on the form, the government will allow you to keep $2550 of your annual wages without withholding taxes. Only the net wages above this exemption are then subject to tax withholding. The more allowances you claim, the higher your take-home pay. If you claim "0" allowances, you will have the most amount of taxes withheld.
Generally, you are allowed to take an allowance for yourself, your spouse and each of your dependents. That's why you need to review your W-4 when you are married, divorced, have a baby or have a child who no longer qualifies as a dependent. You also need to update your W-4 if you expect to have a significant change in your non-wage income. Money you receive from interest, dividends, alimony, prizes, unemployment compensation, or income from a hobby are examples of non-wage income.
There's no deadline as to when you can file a W-4 form. If you do not give your employer a completed form, your employer is required to withhold the highest amount possible - as if you are single and have no allowances. You can change your W-4 form at any time, but it's best to do it as early as possible so you have the correct taxes withheld. You should update your W-4 within 10 days of a divorce or of any event that decreases the amount of withholdings you can claim. You can always claim fewer allowances than what you're entitled to, but generally you cannot claim more. Once you file a W-4 with your employer it stays in effect until you change it.
Ideally, if you are getting the right amount of taxes taken out of each paycheck, you won't have to pay taxes in April. However, the worksheets for figuring out your withholdings cannot account for everyone's unique situation, such as having more than one job at the same time, non-wage income, or if both you and your spouse work. So that's why most of us either get a refund or have to pay Uncle Sam more.
Make next year's taxes easier by taking some time this year to review your W-4 form. If your tax withholding is incorrect, you'll end up paying a lot of taxes when you file your tax return or you'll have money coming back to you that you could have had during the year and used for Christmas gifts!