How to Decide on Zero vs. One Income Tax Deduction

You should update your W-4 with your employer every year to maximize the amount of pay that you receive and to minimize the amount of tax owed or received back on your tax return. By choosing greater or fewer deductions, you will end up with more or less income tax withheld from your paychecks throughout the year. Base the number of deductions to take on last year's return.

Difficulty: Moderately Easy

Instructions

1. Determine how much money you got as a refund or had to pay on last year's tax return. If you had to pay at the end of the year, then you are claiming too many deductions on your W-4. If you got a large refund, then you are claiming too few deductions. By claiming too few deductions your paychecks are smaller than they should be throughout the year because you are giving that money that you should be getting to the government to hold onto until they send it back at the end of the year in the form of a tax return.

2. Figure out how many deductions you will be claiming for next year. Due to the simplicity of the worksheet on the back of the W-4 form to aid you in deciding on the number of deductions that you should be claiming, errors are often made that lets the government have use of your money all through the year. You would be much better off if you had the use of that money at each paycheck.

3. Choose more deductions, if you need the money you would normally receive as a tax refund on every paycheck to help make ends meet. If you are doing just fine on the income you make and would like the government to be your savings plan, then choose the lower number of deductions and look forward to the refund at the end of the year.

Tips & Warnings

• Beware that if you miscalculate the amount of tax that you owe compared to what you have withheld by more than $500, there is a penalty due on your tax return for the year. The government doesn't like to lose use of that money for the year.