Save money by balancing W-4 allowances

This was originally published on Monday, August 11, 2014, in the Pacific Daily News.  Click here to subscribe to the PDN.

According to the Internal Revenue Service’s website, the average 2012 Federal tax refund was $2,985. If you divide that by 12, on average, those who received refunds overpaid their total tax amount by $248.75 a month. In other words, those taxpayers could have increased their take home pay by nearly $250 a month. Instead, that income is going to the government in the form of an interest-free loan.

Your W-4 determines how much income tax is withheld from your paycheck. The W-4 allows you to select allowances based on your life situation such as marital status, dependents or how many jobs you work. The more allowances you claim, the less tax is withheld from your paycheck. The more you withhold, you take home less and you will receive a smaller refund. The opposite applies if you choose to claim more allowances.

The minimum allowances you can claim is “0”. If you claim zero, the maximum amount of taxes will be withheld. Meaning your paycheck will be smaller, but you will probably receive a large refund check. If you are claimed on someone else’s taxes, you should claim zero.

If you are the head of a household, you can claim each dependent as an allowance. If you have a second job, you can also claim that as an allowance. Your goal should be to balance out your payments so that you are neither paying nor receiving a large amount at the end of the year. The Internal Revenue Service’s website has an IRS Withholding Calculator to help you find the right balances of allowances: Have your most recent pay stub and your most recent income tax forms that you filed available to help you answer the series of questions. In the end, the withholding amount is computed for you.

If you determine that you are overpaying or underpaying the IRS, you can make changes to your W-4 at any time. You can ask your employer for a new W-4 form or go to the IRS website,, to download a new form. You will turn in the newly completed form to your employer, not the IRS. The changes should take place in a month or two.

You should review your W-4 yearly, especially when you have a major change in your personal life. Some of these changes may affect your income or entitle you to other deductions or credits on your taxes. Here are some other reasons why you may want to revise your W-4:

• Marital status: Getting married or divorced will change your taxes. Married persons filing jointly usually qualify for lower taxes and possibly other deductions. If you get divorced, you are once again counted as single.

• A new addition: If you have a gained a new dependent or adopted one, you can claim an additional allowance. Your child may qualify for the Child Tax Credit. If you adopt a child, there are other tax credits you may qualify for.

• Employment: Getting a new job or a second job is definitely a reason to update your W-4. If your income increases, so does the amount of taxable income. Even if a side job or your home business does not require a W-4, you can always make adjustments to your main job account. If the opposite happens and you become unemployed for part of the year and get a new job, you may need to adjust your withholding to make up for the time you were not employed. The same goes with your spouse. Any changes in your household’s income should prompt you to review your withholdings.

If you fail to adjust your W-4 allowances, you may be inaccurately calculating the amount of withholdings, which could change the dynamics of your finances.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at and read past columns at the Money Matters blog at


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