Budgeting

What Is the Difference Between Claiming 1 and 0 on Your Taxes?

Taxpayers file annually, and yet it seems the filing process 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 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 reducing the amount of money withheld each paycheck. 

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 Taxes?

Stressing out about the question, “Should I claim 1 or 0 on my taxes?” 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 Form

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 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 withholding this tax season, you will need to claim dependents on step 3 of the W-4 Form. Another method to reduce the amount of tax withheld is to use a deductions worksheet.

Steps for Completion on 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 1: Personal Information

For the first portion of the 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 IRS 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

In previous years, taxpayers indicated on the W-4 if they had personal exemptions or dependency exemptions. But 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 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. 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 receive monthly payments instead of money in one lump sum. Taxpayers may also now receive advanced 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 IRS. 

Qualifying for the Child Tax Credit

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 that 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 dependents 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 investments 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 Gets a Second Job

If you get a second job, you will need to update your W-4 Form. 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. 

You Are Unemployed Part of the Year

Individuals laid off their job 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 yourself. 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. 

In Conclusion

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 return. 

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, consider applying for an online cash advance loan. The qualification requirements are typically flexible so that you can secure financial relief in as little as one business day, even with bad credit. 

References:

Top 5 Reasons to Adjust Your W-4 Withholding
W-4 Steps
Form W-4 for 2022
Should I Itemize?
Child Tax Credit