How to Fill Out Form W-4, Employee's Withholding Allowance Certificate

Believe it or not, there was a time when America did not have an income tax!  In its early years, the federal government only levied taxes on items such as alcohol, carriages, sugar and tobacco.

The 16th Amendment to the Constitution, which gave Congress the power to collect taxes on income, was ratified on February 12, 1913.  At first, this federal income tax was a tax solely on the rich.

Back then, tax bills were paid annually, and taxpayers would calculate the full amount of income taxes they owed for the previous year and write one check to the government.  For years, politicians sought to put into effect income tax withholding - where taxpayers would have the tax withheld from their paychecks - but they were not successful until World War II.    In 1942, at the urging of the Department of Treasury, Walt Disney produced and distributed a feature called "The New Spirit," which used Donald Duck to convince the public of their "patriotic duty" to help fund the war effort.  "Taxes for the Axis" was the call to action.  Besides, they argued, withholding was much more convenient than having to put all that money in a savings account until it was time to pay the tax!!

That was the beginning of the withholding tax and that is how you find yourself sitting there all these years later, scratching your head and wondering, How am I supposed to fill out this Form W-4???

To explain how to fill out the W-4, we need to start by quelling a common myth that people have about their tax bill.  Because you pay your taxes throughout the year, you may not have realized how much you are paying the federal government.  If, on April 15th, you get a refund, that does not mean that you have not paid taxes.  You can find the actual amount of tax that you owed on your 2012 income on line 61 of the 2012 Form 1040.  Line 62 shows the amount of federal income tax that was withheld from your paycheck during the year (Donald Duck thanks you!), and the difference between these two numbers is the amount that is either refunded or due.

Your tax refund is actually the amount that you OVER-paid.  Think of it this way:  that over-payment could have been in your savings account or other investment earning interest.

The ideal thing to do would be to have NO refund and NO amount due at the end of the year.  The point of the Form W-4 is not only to inform your employer of how much to withhold, but also to calculate how much tax you will owe for the tax year.  The goal is to have a "net zero" tax liability - so that you neither owe, nor receive a refund on April 15th.

If after filing your taxes last year you received a big refund, or if the balance due was more than you were able to comfortably pay, or if you were subject to a penalty, then you may need to fill out a new W-4.

You can obtain a Form W-4 from your employer or go to the IRS website.  You should give the new form to your employer.  Your employer has about 30 days to put the new W-4 into effect.  Keep this in mind when you are determining the number of paychecks you have left in the current year.

Other times when you should consider filing out a new W-4 are when you have certain personal changes in your life such as marriage, divorce, or birth of a new child.  Financial changes such as retirement, filing bankruptcy, or when you or your spouse start or stop a job.

The thing to remember about the W-4 is that there is an inverse relationship between the number of allowances you claim and the amount of federal income tax withheld from your paycheck.  Therefore, if you want to INCREASE your withholding (i.e., increase the amount of federal income tax withheld), then you will want to DECREASE the number of allowances you claim.  If you want to DECREASE your withholding (i.e., decrease the amount of federal income tax withheld), then you will want to INCREASE the number of allowances you claim.  The caveat here is that you can only claim the number of allowances to which you are actually entitled.

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