Thursday, March 26, 2009

W4: What's your deduction?

If you ask an accountant for help filling out a W-4 form, the logical advice is try to claim as many exemptions so that your monthly withholding is as low as legally possible. The thinking here is that there's no use providing an interest-free loan to the govt by paying possibly more than you should in monthly withholding. Instead, pay as little as possible and send the IRS a check on April 15. This is a very logical advice but I have never followed it. For as long as I can remember, I have always put 1 on my W-4 form and I haven't changed it even after getting married.

The problem with this approach is how many of us really like the idea of cutting a big check to the govt on April 15? Most of us like to get refunds back (in fact, some people like it so much they think it's a windfall. It's not!). Apart from the illogical need to get money back, unless you've been investing that money during the year, it may be pretty hard to come up with the entire amount on April 15.

Another reason is the April 15 deadline is really only effective if you owe the govt money. If you think you are due a refund, you can file an extension and submit your taxes way after the April 15 deadline. You can still file an extension even if you owe but you are responsible for the interest accrued from the 15th.