Taxpayers file annually, and yet it seems the filing process with federal taxes never gets more accessible or less confusing. If you recently started a new job and need to complete a W-4, you may wonder, “Should I claim 1 or 0 on my tax forms?”
The good news is that this question is no longer relevant, so you don’t have to worry about the difference between claiming 1 or 0 on tax forms! Why? As of 2020, the Internal Revenue Service updated the W-4 Form. The W-4 no longer asks taxpayers if they want to claim a specific number of allowances or exemptions.
Learn how to file your taxes using the new W-4 Form to get the most significant tax return possible and avoid legal ramifications.
What Is a W-4 Tax Form?
It’s essential first to learn what a W-4 Form is before learning how to get a larger tax refund or trying to reduce the amount of money withheld each paycheck with every pay period.
You need to complete numerous forms when you begin working for a new employer. The Employee’s Withholding Certificate, also called a W-4, lets the employer know how much federal income tax to withhold from your paychecks.
Should I Claim 1 or 0 on My W-4?
Stressing out about the question, “Should I claim 1 or 0 on my tax refund?” The new W-4 Form no longer asks about allowances or exemptions. Having to worry about a new tax form may seem stressful, but no longer having to worry about the number of allowances you want or claiming zero allowances.
Tax Allowances and Exemptions on a W-4
A lot has changed about the tax refund process since 2020. You no longer have to concern yourself with allowances and exemptions this upcoming tax season. But how did these tax terms affect finances previously?
A tax allowance reduced the amount of money withheld from paychecks for income tax. The higher the number of claim allowances a person requested, the more money they received with each paycheck due to a reduced income tax. Claiming zero allowances meant having the most withheld from a paycheck for income taxes.
Exemptions allowed certain taxpayers to exclude specific types of income from taxation to get extra money. Taxpayers recorded this information on the IRS Form 1040. With additional monthly income, you could decide which debts to pay first to save on interest rate fees. Previously, taxpayers were able to claim personal exemptions or dependency exemptions.
The new W-4 Form has made filing taxes much less complicated for taxpayers. You no longer need to worry about inputting the correct number of allowances to get more money for each paycheck. If you want to lower your tax amount this tax season, you will need to claim dependents on step 3 of the W-4 Form. Another method to reduce tax withholdings is to use a deductions worksheet.
Steps for Completion of Form W-4
There are five steps you must follow to complete a W-4. Most people only need to complete steps one and five. Still, you may have to provide additional information depending on your financial circumstances.
Step to Completion | A Brief Overview |
| Step 1: Personal Information With Your Form W-4 | – Provide your name – Complete address – Social Security Number – Filing status |
| Step 2: Multiple Jobs or Spouse Works | – Complete this step if you: – Work more than one job at a time – Are married, filing jointly, and your spouse works – Use IRS tax withholding estimator to determine federal income tax |
| Step 3: Claim Dependents On Your Form W-4 | – List the number of children or dependents – Calculate credits for dependents – Consider eligibility for Child Tax Credit |
| Step 4: Other Adjustments | – Section 4(A) – Report passive income – Section 4(B) – Choose standard or itemized deductions – Section 4(C) – Adjust withholding if needed |
| Step 5: Signing | – Sign your name and fill out the date |
Below is more detail on each step:
Step 1: Personal Information With Your Form W-4
For the first portion of the form W-4, you must provide your personal information. Include your name, complete address, Social Security Number, and your filing status.
Step 2: Multiple Jobs or Spouse Works
If you are living on one income, you do not need to complete this step. You only need to complete this portion of the W-4 if either of these situations applies to you:
- You work more than one job at a time
- You are married, filing jointly, and your spouse works
The total income earned will affect how much money is withheld. You may use the Internal Revenue Service’s tax withholding estimator to find the correct federal income tax amount to be withheld from your paychecks. The estimate from the IRS tax withholding estimator will be critical in step 4.
Step 3: Claim Dependents On Your Form W-4
In previous years, taxpayers indicated on the W-4 if they had personal exemptions or dependency exemptions. However, due to an amended W-4 Form, taxpayers are instead asked if they have dependents.
To get a correct withholding amount, ensure that you only use the income information for the highest-paying job for steps 3 and 4 of Form W-4. In this step, you will need to list the number of children or dependents you have. Multiply the number of qualifying dependents under 17 years of age by $2,000 and the number of other dependents by $500.
Depending on your taxable income and filing status, you may be eligible to take advantage of the Child Tax Credit.
The Child Tax Credit
The Child Tax Credit is a tax benefit on the W-4 designed to help taxpayers and their families. In 2022, over 36 million households used the Child Tax Credit.1 Eligible taxpayers receive a tax benefit for each qualifying dependent child. With the Child Tax Credit, your tax liability decreases significantly. Keep in mind that only one taxpayer may request the Child Tax Credit on their W-4 during tax time.
As of 2021, the American Rescue Plan increased the maximum annual amount for the Child Tax Credit. Eligible taxpayers may now receive up to $3,000 for every child under eighteen years of age. Or $3,600 for every child under six years of age.
Since July 2021, taxpayers have received monthly payments instead of money in one lump sum. Taxpayers may also now receive advance payments of $250 or $300 per qualifying dependent. Advanced payments require direct deposit information.
The Child Tax Credit is now fully refundable. The taxpayer’s fully refundable tax credits are refundable despite the total tax owed for the tax season. The tax liability can decrease below zero with a fully refundable tax credit. If the taxpayer’s liability is below zero, this can result in a cash payment from the Internal Revenue Service.
Qualifying for the Child Tax Credit On Your Tax Refund
The recipient must be a qualifying taxpayer to receive the Child Tax Credit, and the dependent child must meet specific tax requirements.
Taxpayer Qualification for the Child Tax Credit
Most taxpayers are eligible to receive the Child Tax Credit if they claim biological or adopted children as dependents. However, their income level must fall within a specific range detailed on the W-4. Eligible single taxpayers must make less than $200,000, while married taxpayers who file jointly must make less than $400,000.
A taxpayer may receive additional tax credits by claiming qualifying grandchildren, siblings, nephews, nieces, and foster care children. To claim other family members, the taxpayer must have provided more than half of their financial support for the entire year. The family members must meet the dependency requirements.
Dependent Qualification for the Child Tax Credit
For a child or dependent to qualify for the Child Tax Credit on the W-4, they must meet certain requirements.
The child or dependent must be under the age of 17. They must have lived with the taxpayer applying for the Child Tax Credit for more than half the tax year. The child must not have provided more than half of their support for the tax year.
Finally, the dependent’s residency status must fit into one of these three categories:
- U.S. citizen
- U.S. National
- U.S. resident alien
Step 4: Other Adjustments
You may be able to get more money or less withheld from your paycheck in step 4 of Form W-4.
Section 4(A)
The taxpayer must include information for passive income not earned from employment. Money earned from investment options or retirement income qualifies as passive income. Failure to report passive income may result in a tax bill.
Section 4(B)
Taxpayers can choose to receive a standard deduction or itemized deductions on Form 1040 or 1040-SR. Most taxpayers choose to accept the standard deduction for a greater tax refund. However, itemizing deductions can potentially lower your income tax if the itemized deductions are more than the standard deduction.
These are allowable itemized deductions:
- State and local income
- Sales taxes
- Real estate taxes
- Personal property taxes
- Mortgage interest
- Disaster losses
- Charitable gifts
- Partial medical or dental expenses
Section 4(C)
Complete section 4c if you want additional tax withheld from each pay period. The only time taxpayers may wish to get additional withholding is when money is owed to the IRS. You can lower a potential tax bill by increasing the tax amount withheld.
Step 5: Signing
The final step of Form W-4 is to sign your name and fill out the date.
When Should I Update My W-4 Withholding?
It’s necessary for you to adjust your tax withholding allowances when your finances change or you experience a significant change in your personal life. Certain situations may cause you to pay more in taxes or receive a bigger tax refund. Even if you haven’t experienced extreme life changes, it’s still a good idea to review your withholdings annually.
These are everyday situations that require a tax withholding adjustment:
You or Your Spouse Get a Second Job
If you get a second job, you will need to update your W-4 Form. This is actually the most common reason that people adjust their W-4.2 If you are married and file taxes jointly, you must also update your W-4 if your spouse gets a second job. The higher your income level is, the higher your tax liability will become. A secondary income includes working a high-demand job, working part-time, or doing small tasks for pay. Credit or loan options like personal loans are generally not considered income.
You Are Unemployed Part of the Year
Individuals laid off from their jobs are likely unemployed for part of the year. It is in your best interest to update your W-4. You can avoid paying more taxes than necessary by amending your tax form.
If You Get Married or Divorced
It may be beneficial to file taxes jointly during tax time if you recently got married. Married taxpayers filing jointly receive a lower tax rate than single taxpayers. With that extra income, you can make money work for you. On the other hand, getting divorced may reduce your tax benefits since you now have to file as single or head of household.
If You Have a Baby
If you welcomed a blushing baby into your life, you likely qualify for the Child Tax Credit during tax time. This tax credit could help you get additional financial support during a pivotal moment in your life.
FAQS
The IRS updated the W-4 form to eliminate the option to claim allowances, making it simpler and more intuitive. This change reflects adjustments made in tax law with the Tax Cuts and Jobs Act of 2017 and aims to help individuals match their withholding more accurately to their tax liability.
The new W-4 form includes a five-step process, with each step addressing different elements like income, filing status, and dependents. Additionally, the IRS’s Tax Withholding Estimator is a helpful tool for determining accurate withholdings, especially if you have previously claimed multiple allowances or have a complex tax situation.
Individuals with multiple jobs should pay special attention to Step 2 of the new W-4 form. It’s designed to account for the total income from all jobs in a household. Utilizing the IRS Tax Withholding Estimator can also provide a clear picture of how to allocate withholdings accurately across multiple jobs, especially if one is the highest-paying job.
Since the option to claim tax allowances is no longer available on the W-4 form, you can instead opt for additional withholding in Step 4(c) if you prefer a larger refund come tax time. This will result in having more tax taken out of each paycheck, potentially leading to a larger refund when you file your tax return.
Your tax filing status is a critical factor in determining how much tax is withheld from your paycheck. The new W-4 form requires you to select your filing status in Step 1, which adjusts the withholding calculations accordingly.
To avoid this, it’s crucial to fill out the new W-4 form accurately and review it whenever there’s a significant change in your personal or financial situation. The IRS Tax Estimator can assist in tailoring your withholdings to match your actual tax liability closely.
You can update your W-4 form as often as needed, especially if you experience significant changes like acquiring a new job, losing a job, or changes in your family situation. It’s advisable to review and, if necessary, update your W-4 form at least annually or when significant life changes occur to ensure you pay taxes accurately based on your current circumstances.
On the old form, there wasn’t a specific limit on how many allowances you could claim. The number of allowances was typically tied to your personal and financial situation, including factors such as marital status, dependents, and other tax credits or deductions you were eligible for. Understanding how many allowances to claim was crucial to ensure accurate tax withholding and avoid owing too much tax at the end of the year.
Conclusion With CreditNinja
With the introduction of the new W-4 Form, taxpayers no longer need to worry about how many allowances they want to claim to get more money each paycheck. It’s essential to understand how the W-4 has changed so you can get cash on your preferred schedule. Depending on your specific circumstances, you may like to receive a lump sum of money each paycheck or on your tax refund.
Even if you have not started a new job or experienced a life-changing event, it’s essential to review your W-4 annually. Suppose you do not update your taxes withheld after experiencing one of the situations listed above. In that case, you may end up with a costly tax bill and be fined penalty fees by the IRS.
If you need additional money throughout the tax year, you can look into several loan options, such as personal loan options, different loans, or bad credit loans.
To learn more about these loan options or taxes, check out CreditNinja’s Dojo!
References:
- Brief Child Tax Credit Overview | NCSL.Org
- Top 5 Reasons to Adjust Your W-4 Withholding | TurboTax
- W-4 Steps | IRS
- Form W-4 for 2022 | Investopedia
- Should I Itemize? | IRS
- Child Tax Credit | Investopedia
