When it comes to tax time, any opportunity to receive a bigger tax refund is high on every taxpayer’s list. While there are several ways to increase the amount or likelihood of a refund, all involve a bit of due diligence and planning. Everyone is eager to get a bigger tax refund, however, you should do yourself a favor and research your options to find the best number of allowances for your situation.
Getting Your W-4 Right
Any time you start a new job, unless you’re self-employed or an independent contractor, you have to fill out a W-4. Your employer uses the information you provide on this form to determine how much to withhold from your paycheck for federal income taxes. As a worker, you determine how many allowances you would like to claim, or not, and the appropriate amount is withheld from your earnings as a result. If you claim a lot of allowances, you will receive a larger paycheck. However, come tax time, you are likely going to owe Uncle Sam, or receive a smaller refund – and possibly no refund at all.
On the other hand, if you decide to go with fewer or zero allowances, you are probably having too much withheld from your paychecks. While this nearly guarantees you’ll receive a refund (unless you have outstanding obligations to the IRS), you are also giving the IRS interest-free use of your money for the entire tax year. This money you’d receive in the form of a larger paycheck could be put to use by placing it into an interest-bearing account or obtaining a certificate of deposit. But, not everyone minds having the IRS hold onto their money for them in anticipation of a large refund.
What if I Only Want the Refund?
It is not uncommon for taxpayers to knowingly overpay the IRS by claiming zero allowances. This is often done in anticipation of a larger lump sum refund that can then be used to pay off large bills, take a family vacation or pay an extra mortgage payment. Not everyone is good at saving, and some filers claim zero allowances to help squirrel away some extra money every pay period to spend as they please, or to assist in paying off debt. There’s nothing wrong with this approach, and it works well for many taxpayers.
Bear in mind, if you were due a tax refund but owe back taxes or past-due child support payments, then you may have all or a portion of your tax refund intercepted to settle any arrears.
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What Does "Going Exempt" Mean?
You’ve probably heard the term going exempt from time to time, but you may be unclear exactly what it means. Going exempt is the opposite of claiming zero allowances. Claiming zero allowances means that you are having the most withheld from your paycheck for federal income taxes. When you go exempt, you are claiming complete exemption from any allowances, therefore, having no federal income taxes withheld from your paycheck.
This means you will receive your entire paycheck, without any federal income taxes withheld, but your employer will still likely withhold Social Security and Medicare taxes every time you are paid. There are a few requirements that must be met before you can go exempt, such as your previous year’s tax obligation, and it is advisable that you consult with a qualified tax preparer, or visit the IRS’ website, for more information regarding tax withholdings.