You can also use the refund money to fund some of your IRA for the following year.Ĭontrary to the example of the friend who claimed 10 on her W-4, I had a work colleague who always claimed zero on his taxes. This assumption is if you only have one stream of income. If you have other streams of income, you may not qualify. Of course just because you claim zero doesn’t mean you’ll automatically get a lump sum back. But, you’ll have a nice lump sum come tax season to be able to throw into an emergency fund or savings account. Your paychecks will be smaller each month. If you don’t have a lot of high-interest debt to pay off and you’re fine with having the maximum amount taken out for taxes, claim zero. Or, you could even put it towards long-term investments. If you don’t have a lot of debt, you could use that money to put into a savings account. If you have $1,000 in credit card debt that has an APR of 20 percent, you’d be paying $200 in interest.īreaking it down this way shows that paying off your high-interest debt with your higher monthly paychecks makes more sense. That’s enough to buy a large cup of coffee. This would mean you’d be able to earn $5 in interest from the bank. Let’s say you’re starting from scratch and have nothing saved. To illustrate that difference, let’s say you had an extra $500 each month because you claimed one instead of zero. The reason for this simply boils down to interest rates.Īn online savings account has an interest of around 1 percent while your credit card’s interest rate may hover at 20 percent. You should make it a priority to pay off debt before you start saving money in an interest-bearing savings account.
This means you’ll have more in your monthly paychecks to pay off debt.ĭo you have high-interest credit card debt? If you decide to claim one, you will have fewer taxes taken out of your check. You may also break even (get nothing back but owe nothing).You’ll still have a chance to receive a refund during tax season.It may be a good option if you’re single and have only one job/source of income.If you decide you want to claim one, you should know that: If you’re still in college and your parents claim you) You should claim zero if someone else claims you as a dependent on their tax return (i.e.You’ll most likely receive a refund come tax time (in April).The maximum amount of taxes will be withheld from each paycheck.If you decide to claim zero, you should know that: If you claim zero, it means the most amount of taxes will be withheld from your paycheck. You’re entitled to one allowance for yourself of a dependent, but just because you are doesn’t mean you absolutely have to. If you’re grappling with the claiming one or zero, here’s what you should consider. This requires you to put down how many you want to claim.
When you first start working at a place of employment, they usually ask if you to fill out a W-4. When it was tax time, however, she ended up owing close to $4,000. She wanted more money from her monthly paychecks. However, if you’re okay with living with a smaller paycheck and having a lump sum come your way during tax season, then you may want to claim a smaller number such as 0 or 1.įor example, a friend of mine who wasn’t married or had kids claimed 10.
If you need the extra money each month and are okay with owing at the end of the year (as this may be the case if you claim a high number), then it might make sense for you to do it this way. There are many reasons why people claim more or less on their W-4s. The more you claim, the fewer taxes are withheld, and your paychecks will be bigger. Generally speaking, the less you claim, the more taxes are withheld from your monthly paychecks. I like to think of the amount you claim on your taxes (if you’re struggling between one and zero) as more of a preference than anything else. What It Means to Claim a Smaller Number vs.
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