The US government taxes wages and requires employers to withhold most of those taxes from each paycheck. When you start a job, you are asked to complete form W-4. This form tells your employer some information about you so they can use the best table to determine the amount of taxes to be withheld from your paycheck. The IRS changed the W-4 form in 2019 to better align it with the December 2017 tax reform changes. Unfortunately, it has caused confusion with married couples who file jointly and both work. An inappropriately completed W-4 can cause a taxpayer to owe a lot with their tax return or create a large refund.

For married couples who file jointly the easiest way to complete the W-4 is to mark “single or married filing separately.” While this may seem incorrect, I’ll explain later why it is the best. The number of children under 17 should be divided between both spouses W-4. If there are two children, generally, each parent should only claim one. If there are an odd number of children, the parent with the higher income should claim the higher number of children. If the joint income of both parents exceeds $400,000, then no children should be claimed. Note that earlier I said children under 17. The child tax credit for these children is $2,000/year. The credit for children 17+ is only $500. I generally tell parents not to include these children on the W-4 unless they are eligible for the American Opportunity Tax Credit (AOTC). If your children are turning 17, we should discuss your W-4 withholdings.

Now for the reason I recommend completing the W-4 as single and only claiming half your children. The US tax on wages allows for a standard deduction (at a minimum) on which you pay no taxes. The tax code also has progressive tax brackets. Progressive tax brackets mean that as you earn more money, the higher income is taxed at a higher rate. The standard deduction and the tax brackets are adjusted for inflation each year. For simplicity in this explanation, I am going to use round numbers in the example. Please note, they are not accurate numbers, but close. I am also going to use 26 pay periods per year, which is every two weeks. I realize that some people are paid weekly, others monthly, and others bi-monthly, but every two weeks is the most common and makes the math simpler. 

The standard deduction is about $13,000 per taxpayer (ignoring head of household taxpayers) or $26,000 per married couple. Assume that you mark “single” on your W-4 and your spouse also does. This means that every paycheck, the first $500 ($13,000 / 26 pay periods) is tax free from each of your paychecks. If you are paid $2,000/pay period, the withholding tables will remove the first $500 before calculating the taxes on the remainder. Together, you will have had $26,000 treated as not taxable. 

If instead, you both mark “Married filing jointly,” then the withholding calculations will consider the first $1,000 as tax free. At the end of the year, the total wages without taxes withheld will be $26,000 each or $52,000. But your standard deduction is only $26,000. Therefore, you will not have paid taxes on $26,000 and that will be due in April with your tax return. If you are the only income earner in a married couple, then it is appropriate for you to mark “married filing jointly.”

This same concept occurs with claiming the child tax credits and when calculating the taxes in different tax brackets. The “married filing jointly” box will have about half the taxes withheld than necessary. That results in a painful amount of taxes due in April. Also, your withholdings are usually only on wages, not investment income. This could cause you to owe even more with your tax return.

Technically, you can mark “married filing jointly” if you also remember to mark the “2 income” box in Step 2. I have seen one company that did not properly register that box and my client had under withholdings despite completing the form properly. For that reason, I just prefer that you mark "single or married filing separately.” Marking this on your W-4 does not require you to file that way. It is solely for calculating tax withholdings.

If you have any changes in your life -- spouses loses a job or starts a job, a child becomes 17, you pick up a side job, you get a significant increase in investment income, you get divorced, etc. -- it is important to look back at your W-4 and adjust as necessary. If you are a client, please reach out to me during the year to discuss.