Recently I decided to re-examine my W4 with my employer.  There’s a number of factors to consider, and there’s not one single perfect approach for deciding what you want to select on this form.  However, there’s definitely something to gain by making sure you’ve got this form updated to make your money work for you the best way possible.

Current Situation

For the last 10 years, I’ve gotten tax deductions in the area of $4000-8000.  As my family and income grow, my returns grow.  It’s gotten to the point where we just plan on some big "bonus" each year to help get all the shopping paid off that we did for the holidays.  Sure, we plan on each return to pay down a credit card or something, but that rarely happens in full.

Calibrating Dependent Count

Well no more.  Up until today, I’ve had 6 deductions claimed for my total family.  When doing the math on some online W4 deduction calculators it turns out I should be declaring 15 to actually get my paychecks stop taking out so much tax so I don’t get too much of a return.  FIFTEEN!?!?  I’ve only got 6 kids…what the heck?

There’s actually a worksheet on the official W4 form where you not only count yourself and your spouse (when filing jointly) and each dependent child in your family.  But there’s also a line where you declare, based on your income range, how many qualifying children you have for the child tax credit.  This was the part I’ve never figured into it that made my returns so large. 

Without this tax credit, I’d probably only be declaring the number of family members I have on my W4.  However, since we apply the credit I actually declare more so that at the end of the year I almost end up with no return, and no owed taxes.

The Paycheck Effect

Now that I’ve changed my W4 to have 15 dependents, I expect my normal $8000 worth of returns to evenly apply to the 26 paychecks I get every year with around another $200-300 increase per paycheck.  Maybe more.

End Benefit

This is huge, but don’t let it make you think you’re getting a pay raise.  All it’s doing is giving you your money when you earned it instead of the next year after letting it sit in the governments pockets.  The way I see it, if I get my $8000 a year early at the cost of paying 15% interest on my credit card with that balance I’m losing well over $1000 a year to this simple little problem.

Now, I know everyone else out there may have a different method to their W4 madness.  It’s very simple for people without families to just declare the minimum.  However, if you’re getting huge returns every year, you really should consider adding a couple of dependents to your W4 so you don’t let the government get all that nice money in their account for free until the end of each year.

 [update] - I finally got my next paycheck reflecting the changes.  My take-home after taxes and deductions went up $205!  Definitely well needed while up against the wall financially every month.