Federal income taxes are unavoidable, but you can do certain things to affect the size of your income tax bill and how much your employer withholds from your paychecks. One of the biggest things you can do is adjust the number of allowances you claim on your W-4. The ideal number of allowances for you depends on your individual situation. If you’re unsure how many to claim, this guide will help you decide.
What You Should Know About Tax Withholding
To understand how allowances work, it helps to first understand the concept of tax withholding. Whenever you get paid, your employer removes, or withholds, a certain amount of money from your paycheck. This withholding covers your taxes, so that instead of paying your taxes with one lump sum during tax season, you pay them gradually throughout the year. Employers in every state must withhold money for federal income taxes. Some states, cities and other municipal governments also require tax withholding.
Withholding is also necessary for pensioners and individuals with other earnings, such as from gambling, bonuses or commissions. If you’re a business owner, independent contractor or otherwise self-employed, you will need to make sure you withhold taxes yourself. You can do this by paying estimated taxes.
Exactly how much your employer withholds will depend largely on how much money you make and how many allowances you claim on your Form W-4. When you fill out your W-4, you are telling your employer how much to withhold from your pay. That’s why you need to fill out a new W-4 anytime you start a new job or experience a big life change like a marriage or the adoption of a child.
What Are Tax Allowances?
A withholding allowance is like an exemption from paying a certain amount of income tax. So when you claim an allowance, you’re telling your employer (and the government) that you qualify not to pay a certain amount of tax. The more allowances you claim, the less tax your employer withholds from your paychecks. If you were to claim zero allowances, your employer would withhold the maximum amount possible. The value of a single allowance is based on factors like your tax bracket, the frequency of your paychecks and your filing status.
Because it directly impacts how much tax you pay, the number of allowances you claim is important. If you don’t claim enough, you overpay your taxes throughout the year and end up with a tax refund come tax season. Claim too many allowances and you’ll probably owe the IRS money. And if you owe too much (more than $1,000) you also have to pay a penalty.
|How Allowances Can Affect Your Tax Return|
|Your Situation||Effect on Your Return||Ramification|
|Too many allowances||You likely owe taxes||You may owe the IRS penalties in addition|
|Too few allowances||You likely receive a tax refund||You didn’t have the money during the year|
How Many Allowances Should I Claim?
To help you calculate the right number of allowances, the IRS has a Personal Allowances Worksheet. You can find this and other worksheets in the same packet as the actual Form W-4. However, the worksheets are only for your personal use. You don’t need to submit them to your employer. If you haven’t used this worksheet before, it is helpful to go through it.
Below is a general guide to how many allowances you should claim, depending in your tax situation.
|General Guidelines for How Many Allowances to Claim|
|Your Situation||Allowances to Claim|
|Someone claims you as a dependent||0-1|
|Single with one job; No one else claims you as a dependent||1-2|
|Married couple with one dependent||2|
|Head of household with one dependent||3|
|Married couple with two dependents||3|
|Married couple with two dependents||4|
Let’s say someone else is claiming you as a dependent. For example, you’re a college student and your parents claim you as a dependent on their tax return. You should claim one allowance, though you could also claim zero if you wanted to.
If you’re a single filer with one job and no dependents, you should claim either one or two allowances. One allowance will most likely leave you getting a refund. Claiming two allowances will get you closer to paying your exact tax liability (i.e. how much you owe in taxes). Two allowances may result in you owing a little bit come tax season, but that isn’t necessarily bad. It means you have more money in your pocket all year. That could make it easier to pay bills or it could leave you with more to save for retirement.
If you have multiple jobs, you have the same number of allowances. You just need to split your allowances across all your jobs. So if you qualify for one allowance and work two jobs, one of your W-4 forms should claim one allowance, while the other claims zero.
The allowances a married couple should claim will depend on how many dependents you have, whether both spouses have a job and how much you make. A married couple with no dependents should probably claim a total of two allowances. You need to split these allowances between all of your jobs. That could mean one of you claims two allowances while the other claims zero, or you could each claim one.
In general, married couples can add one allowance for each dependent. That means you have a total of three allowances if you have one dependent, four allowances if you have two dependents, five allowances if you have three dependents and so on.
However, things can get a bit tricky when you have dependents. Your income and some other factors may give you the opportunity to add additional allowances. For example, you can add one allowance if you’re claiming the Child Tax Credit. If you have dependents, you should go through the Personal Allowances Worksheet mentioned above to ensure you claim the proper allowances. The worksheet is also very helpful if you have a low income.
If you have a complex tax situation, it may be wise to work with a financial advisor who specializes in tax issues.
Claiming Allowances for Itemized Deductions
Itemizing your deductions could also affect the number of allowances you claim. Deductions reduce your taxable income and affect the size of your final tax bill. So if you itemize and expect to have more deductions this year than last year, you may want to claim additional allowances. For example, maybe you could claim an extra tax allowance if you bought a new property or want a tax write-off for making another charitable donation.
In order to find out how many additional allowances you can claim for your itemized deductions, you’ll need to complete the “Deductions and Adjustments Worksheet” on the second page of the W-4 form. You can use the same worksheet if you want to claim extra allowances for any adjustments to income, like the student loan interest deduction.
Do keep in mind that the Republican tax plan – which passed in December 2017 and came into effect for the 2018 tax year – has made an impact on itemized deductions. Specifically, it has doubled the standard deduction, so for many people it now makes more sense to just claim that deduction than to itemize.
Claiming an Exemption From Withholding
If the IRS refunded you last year for all of the federal income tax that was withheld, and if you expect that to happen again this year, you can claim exemption from withholding. To do so, simply write “Exempt” on line 7 of your W-4. You cannot claim exemption from withholding if either one of the following is true:
- Another person can claim you as a dependent
- Your income exceeds $1,000 and includes more than $350 of unearned income, such as interest or dividends
Keep in mind that this exemption only applies to federal income tax. You still need to pay the FICA taxes for Social Security and Medicare.
Fine-Tuning Your Withholding
Just to reiterate, you can claim as many or as few allowances as you want. If you qualify for two allowances, you don’t have to take two. Taking a different amount would mean you overpay or underpay your taxes, but you’re allowed to do it. You may want to claim a different amount to change the size of your paychecks. This is a personal choice that helps you plan your budget throughout the year.
At the same time, you can submit a new W-4 at any time during the year. So if you decide that you want larger or smaller paychecks, you can submit a new W-4 to your employer with a different number of allowances.
You can also fine-tune you tax withholding further by withholding a specific dollar amount. On line 6 of the Form W-4, you can enter an amount for your employer to withhold from each paycheck. This is in addition to your allowances. The reason you may want to claim a dollar amount is so that you cover your tax withholding throughout the year without owing too much or getting too big a refund in April.
The number of tax allowances you claim impacts the size of your paycheck. The more allowances you claim, the less your employer withholds. Less withholding also means a bigger paycheck. Conversely, your employer withholds more and your paychecks are smaller if you claim fewer allowances. It’s important to claim the right allowances so that you can have as much money in-hand throughout the year without owing too much come tax season. The perfect number of allowances for you depends on your personal situation. This includes factors like your filing status, how many dependents you have and your taxable income. If you’re concerned about the amount your employer withholds, you can also refer to the withholding calculator provided by the IRS. Don’t forget that you can update the allowances on your W-4 at any time. Simply fill out a new form and give it to your employer.
- Consider speaking with a financial advisor. Many advisors are tax experts and can help you understand how taxes impact your financial plan. SmartAsset’s matching tool can pair you with nearby advisors in just a few minutes. Then, you’ll have the chance to speak with them on the phone or in person and choose who to work with.
- You’ll save time (and stress!) if you gather and organize all the supporting documents required to file your taxes. This means your W-2 or 1099s, student loan interest information, and a slew of other documents depending on how your financial situation. Tax time can be a worrisome process, and anything you can do beforehand will make the process smoother and less time-consuming.
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