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W-4 Withholding Tax Form – Instructions for Claiming Exemptions & Allowances

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In an effort to help make filing taxes easier this year, we are breaking down the various IRS tax forms to help you know if you need them, and how to use them.

Each time you begin a new job, one of the forms you’ll be asked to fill out is a Form W-4. This form helps your employer determine how much to withhold from your paycheck¬†in taxes, based on the number of exemptions you claim on your tax return.

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While this method is not very precise, it is fairly flexible, as you can adjust the number of exemptions you put down (i.e. adjust federal income tax withholding allowances).

Exemptions & Allowances

Generally when you receive a Form W-4, there is a guide on the top half of the sheet which helps you determine how many exemptions you should write down. This is only a guide, though, and you can add or subtract exemptions to more closely match your actual tax situation. (This should not be extreme, however, as the IRS does have the power to override this if they feel that you are attempting to game the system in some way.) You can also ask that additional, specific amounts be withheld from your paycheck if you would like to be more precise about the amount that is set aside.

There are instances where you may want to think about increasing, or decreasing the number of exemptions you are claiming. Talk to your company’s HR department about filling out a new form if you feel you many benefit from a change.

That being said, how do you know when you might need to adjust your exemptions? Here are some signs to look out for.

1. Increasing Exemptions

If you increase the number of exemptions on your W-4, you will see more money in your paycheck and less at the end of the year.You might want to increase the number of exemptions if any of the following apply to you:

  • Numerous Deductions. If you know that you will have a lot of tax deductions, such as mortgage interest, consider an increase in exemptions.
  • Large Tax Returns. If you find that you are getting a large tax refund at the end of each year, you can get some of that money in your pocket sooner by adjusting your Form W-4 so that you have less set aside for taxes.
  • Birth of a Child. With the birth of a child comes added financial¬†responsibility. Increase your exemptions and receive more money in your check to cover these costs of having a baby.

Keep in mind that you generally need to have paid at least 90% of your total tax liability before the end of the year, so you don’t want to take too many exemptions and end up being hit with an underpayment penalty.

2. Decreasing Exemptions

If you decrease exemptions, you’re in for a bigger refund check come tax time, but you won’t be seeing as much in your regular paychecks. Think about decreasing your exemptions if you fall into any of these categories.

  • You Earn Additional Income. You know that you have other income that won’t have tax withheld (e.g. you have your own business and need to pay self employment taxes).
  • You Keep Getting Hit at Tax Time. If you find that you keep owing the government at tax time, you may need to decrease your exemptions so that more is deducted from your paychecks during the year.
  • You Want that Big Return. If you just really love getting that big fat government check in the mail (or via direct deposit), keep your exemptions low.

3. Claiming Full Exemption

On this form, you can also declare that you are exempt from all tax withholding because you will not have any tax liability this year.

This is something to be done carefully. More often than not, these forms are filled out at the beginning of the year, or at some other point, when you may not be able to accurately predict how your financial situation for the rest of the year will affect your taxes.

In some situations, though, it does make sense. If, for example, you are a retiree working a few hours a week at a part time job, you can reasonably expect to earn only a small amount. All of the withheld tax would be refunded anyway, so you might as well go ahead and claim full exemption.

Making the Right Choices

There are worksheets available from the IRS to help you calculate the best withholding situation for you. A common approach, however, is to do a quick calculation mid-year of the taxes you would owe if your withholding amounts and income remained the same throughout the rest of the year. If you end up with either a large refund or a large tax bill, you can usually submit a new W-4 to your human resources department to adjust the exemptions again.

Kira Botkin
Kira is a longtime blogger and serial entrepreneur who enjoys gardening, garage sales, and finding stray animals. She lives in Columbus, Ohio, where football is a distinct season, and by day runs a research study for people with multiple sclerosis. She hopes that the MoneyCrashers team can help you achieve your goals and live a great life.

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