W4

[Teetee16]

How do I fill out my w4 correctly so I dont owe the irs?

[ClarissaA1]

Start with the IRS Tax Withholding Estimator and Turbo Tax W-4 Calculator  to correctly fill out your W4 so you have accurate withholding (and therefore don't have a surprise tax bill at the end of the year.)

Once you have a good estimate for what you will need to pay for the year, you can use that information to complete a new W-4 that makes any changes needed to adjust your withholding to the correct amount for the year. 

[Teetee16]

The area where its asking for dependant and multiply i enter 2,000. It looks completely different than the other worksheet, so do that mean, more or less taxes will come out? Im trying to prevent from owing 

[ClarissaA]

If you enter dependent information into the W-4 and multiply that number by $2000, it will result in LESS taxes being withheld from your paychecks (and possibly a larger amount due at the end of the year!)   
By entering the dependent information in Step 3 of your W-4, you are telling your employer that you will be taking a tax credit at the end of the year for the dependent (and that you don't need as much tax taken out because you will have a credit for that amount to claim later.)   

Keep in mind that the W-4 doesn't do a great job of capturing other income that you may owe taxes on such as pensions, investments, or rental properties.  If you have these other income sources, you will want to enter information about that income in Step 4(a).    If you have a second job or income from gig work, you would complete the Multiple Jobs Worksheet (found on page 3 of the form,) and then include the amount for extra taxes to be withheld from each paycheck on line 4(c)

[Terri Lynn]

Great question!

You have hit on a common point of confusion with the new W-4 form! The way dependents and other adjustments are handled is quite different than the old "allowances" system.

Entering $2,000 in the dependent section of your W-4:

• It means LESS taxes will be withheld per paycheck.

Let me explain why:

The W-4 Form

The current W-4 form (revised in 2020) no longer uses "allowances." Instead, it aims to be more direct about how your tax situation (filing status, multiple jobs, dependents, other income/deductions) impacts your withholding.

• Step 1: Personal Information (Name, SSN, Filing Status).
• Step 2: Multiple Jobs or Spouse Works (Crucial for avoiding under-withholding if you have more than one job or a working spouse).
• Step 3: Claim Dependents and Other Credits.
• Step 4: Other Adjustments (Other income, deductions, extra withholding).
• Step 5: Sign.

Understanding Step 3: Claiming Dependents and Other Credits

When you enter an amount in Step 3, you are essentially telling your employer: "I expect to receive X amount in tax credits (like the Child Tax Credit or Credit for Other Dependents) when I file my tax return. Please reduce my withholding by this amount throughout the year."

• Child Tax Credit: For each qualifying child under age 17, you can claim up to $2,000.
• Credit for Other Dependents: For other qualifying dependents (like an older child, parent, etc.), you can claim up to $500.

Why $2,000 in Step 3 means less withholding:

Tax credits directly reduce your tax bill, dollar-for-dollar. By putting $2,000 in Step 3, your employer's payroll system will calculate that you will owe $2,000 less in federal income tax for the year. To account for this, they will withhold $2,000 less from your total annual pay, spreading that reduction across your paychecks.

Example:

If your estimated annual tax liability was $7,681 (from our previous calculation) and you enter $2,000 in Step 3, your employer will aim to withhold only $5,681 ($7,681 - $2,000) from your paychecks over the year. This means more money in each paycheck for you.

Since your goal is to prevent owing taxes at the end of the year, you need to be careful with Step 3, especially if you have other income sources or if your income is close to the phase-out limits for these credits.

Please feel free to reach backout with any additional questions or concerns you might have!

Thanks for your questions today, and please have an amazing rest of your day!