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This Tax Form Can Give You a Bigger Refund

By Dan Caplinger - Jan 24, 2019 at 9:59PM

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But you might actually prefer the alternative -- if it means bigger paychecks now.

Nobody likes to pay taxes, and with tax season just ahead, millions of Americans will face the ordeal of preparing their returns in the coming months. With a new Form 1040 this year, there'll be a steep learning curve for many taxpayers to navigate.

Yet there's a tax form that you won't have to file with the IRS this April that can have an even larger impact on your taxes than your 1040. Moreover, many people only see this form once -- when they start a new job. Form W-4 plays a huge role in determining whether you'll owe tax or get a refund in April, and so it's important to make sure you understand how it works and when it makes sense to file a replacement.

IRS form labeled W-4 Employee's Withholding Allowance Certificate.

Image source: IRS.

Why Form W-4 is so important

The Employee's Withholding Allowance Certificate, better known as Form W-4, is one of the shortest tax forms you'll ever see. It has just seven lines, and four of those are taken up by just your name, address, Social Security number, and filing status. Yet despite its brevity, Form W-4 is a much bigger deal than most new employees give it credit for -- especially as they're having to deal with the big pile of documents competing for their attention at a new job.

Form W-4's purpose is to tell your employer how much money to withhold from your paychecks for federal tax purposes. As the form indicates, there are two key numbers that determine your withholding: the number of withholding allowances you claim, and any additional amount you choose to have withheld voluntarily. The filing status on Line 3 of Form W-4 is also important in determining the amount withheld.

If you don't have enough money withheld from your paychecks to cover federal tax, then you'll have to write a check at tax time -- and even potentially have to pay penalties. On the other hand, if you have too much money withheld, you'll get a big refund -- but you'll also have given up the chance to have higher paychecks during the year instead of waiting until the year is over to get it back in your refund check.

The devil's in the worksheets

Form W-4's size is misleading, because you actually need worksheets in order to come up with the correct numbers to put on the form. The first is known as the Personal Allowances Worksheet, and it's just the starting point to figuring out how many allowances you take on Line 5 of the W-4 form.

IRS worksheet labeled Personal Allowances Worksheet.

Image source: IRS.

As you can see, the form introduces several tax concepts that you might not immediately know about:

  • Filing as a head of household.
  • Taking the child tax credit.
  • Using the credit for other dependents.
  • Incorporating any other tax credits that you qualify for.

Even worse is that you might also have to use other worksheets. One primarily deals with those who itemize their deductions or have a lot of income from sources other than their job and is fairly straightforward. But the other involves the common situation among married couples in which both people work. In that case, you have to use information from both jobs in order to coordinate withholding correctly. Then, each spouse has to file a Form W-4 that takes the other spouse's elections into account as well.

Use Form W-4 to your advantage

Although the calculations involved with Form W-4 can be confusing, it's helpful to keep some basic things in mind:

  • The more withholding allowances you take, the less money will get withheld from your paychecks. That'll boost the size of your regular pay but reduce your year-end refund.
  • If you reduce the number of withholding allowances you take, then your withholding will go up. That'll cut the size of your paycheck, but it'll potentially cut your tax bill, or even give you a refund when you file.
  • Filing as a married person leads to lower withholding than filing as a single person. The form gives you the option to elect the higher single withholding rate even if you're married. Note that it doesn't give you the ability to do the reverse.

So if you want to adjust the size of your refund or payment when you file your return, making changes to your W-4 is a great way to get started. That's especially important when you go through a major life change, such as getting married or divorced, having a child, or seeing your children reach adulthood. Those changes have tax ramifications, and it's important to make sure your withholding keeps up.

You don't have to fill out Form W-4 this tax season, but you might want to anyway. With the chance to help determine how much in withholding your employer takes out of your pay, you can use Form W-4 to find the right balance between current pay and what, if anything, you get back from the IRS when you file your taxes for the year.

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