A new employee is filling out a W4 form. He is married, will be filing jointly, and has no children. His wife works as well,
but makes roughly 66% as much as he will be making in his new job. In order to assure that he minimizes his pay-in to the IRS for the following year, how many exemptions should he and his wife claim in their W4s?
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There are different schools of thought on how to fill out tax withholding forms. One school suggests entering as few exemptions as possible (even 0) so that the maximum amount of taxes will be taken out of each paycheck. This most often results in a large tax return after April 15th. Another school of thought is to put as many truthful exemptions as possible, so that the federal withholding from each paycheck is very low (and the paycheck itself, higher). The risk here is that when the individual files his tax return in April, he might owe the government money because not enough was withheld from his paychecks. The final school of thought (and considered the most prudent) is to attempt to have the correct amount of taxes withheld from each paycheck so that come April 15th, the individual neither owes money, nor receives a large return.
Certainly, there are those who look forward to a large tax return every April, thinking of the check as a yearly bonus. Within this group, there are several who will use this tax return to make a large purchase (say, a down payment on a new car, or a vacation) that they might not otherwise have considered if the money had been spread out over a series of paychecks and entered in to their monthly budget.
What many don't consider is that this tax return (especially for those who are not receiving any "credits" for children) is actually simply a late payment on what they should have been earning all along. In many ways, allowing the government to withhold too much money (with plans for a one-time tax return to arrive mid-April) is like giving the government an interest free loan. In other words, had the individual simply taken the money up front (rather than had it withheld for taxes), he could have put it in his own bank account and earned interest on it. Instead, the government uses it and pays it back at no interest. This is simply my opinion, but when a family or individual has no dependents, I believe it is far better to owe the government money on tax day than to receive a large tax return.
If this couple wishes to be conservative and minimize their chances of owing money on April 15th, I would advise the man to claim himself as an independent (by putting a 1 in line A) and to consider himself the head of household (but putting a 1 in line E). On his W-4, he will have a total of 2 exemptions. His wife should then claim herself as an independent (by putting a 1 in line A). Their total exemptions would be 3.
If they wish to be a little less conservative and raise their in-pocket pay throughout the year (with the forethought of putting some in savings rather than taken out as withholdings), one or both could also put a 1 in line C and raise their total exemptions to 4 or 5. This would increase their monthly paychecks, but also their risk of owing money. Again, in my opinion, it is the best option if they are responsible enough to put the extra into savings so they are able to pay the extra taxes if they owe them. At least in the months leading up to April, their money can work for them by accruing interest in savings account.
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