Update: Based on the new tax code signed by President Trump on Dec. 22, 2017, the IRS released new tax withholding guidelines. Taxpayers should have seen changes to their paychecks, reflecting the new tax plan, in February 2018. You may not need to update your W-4, but it is a good idea to double check your withholding tax allowances with the new IRS guidelines.
Paying taxes is unavoidable. How high your income tax bill will be depends on a number of factors, including your filing status, how much money you make and whether you can claim any tax deductions or credits. Allowances play a special role too. If you’re looking at a W-4 form and you don’t know how many tax allowances to claim, we’ve got answers to all of your questions.
What You Should Know About Tax Withholding
In order to understand how allowances work, it might help to understand the concept of withholding. Whenever you get paid, a certain amount of income tax is automatically withdrawn (or withheld) from your check and turned over to the IRS.
Withholding tax can also be collected from individuals who receive earnings from gambling, bonuses and commissions. There can be tax withheld from pensioners as well. If you’re a business owner or an independent contractor, you withhold your own income taxes by paying estimated taxes.
Tax withholding becomes an issue whenever you’re filling out a W-4 form at the start of a new job or whenever you’ve experienced a significant event in your life that affects your tax-filing status, like the adoption of a child or a marriage.
What Are Tax Allowances?
Withholding allowances directly affect how much money is withheld from your pay. Claiming more allowances will lower the amount of income tax that’s taken out of your check. Conversely, if the total number of allowances you’re claiming is zero, that means you’ll have the most income tax withheld from your take-home pay.
Allowances matter. If you don’t claim enough of them and you have too much money sent to the government, you’ll end up with a tax refund. But if you claim too many allowances, you’ll probably owe the IRS some money at the end of the tax year and possibly pay a penalty for your mistake.
The value of a single allowance and how it impacts your salary is based on your tax bracket and how frequently you receive a paycheck. The exact amount of tax that your employer is expected to withhold also takes into account whether you’re filing as a single person, a married person or the head of your household.
How Many Allowances Should I Claim?
When deciding the number of tax allowances you’ll have to claim, your filing status, the number of jobs you have and whether you have dependents will come into play. So how many allowances do you need? We’ll break it down for you.
Let’s say you’re a single person living on your own. You have zero dependents and only one job, so ideally the total number of allowances you’re claiming would be two. On your W-4 form, you would write a “1” beside line A and a “1” next to line D under the Personal Allowances Worksheet.
You could choose to claim zero tax allowances. That would probably guarantee you a tax refund, but as a result, your paychecks would be smaller. You could claim one allowance as well if you’re interested in getting a refund.
Tax allowances for married couples take into account whether they have kids and whether they live in two-earner households. If you have no children and both you and your spouse have jobs, it’s a good idea to claim one allowance and have your spouse do the same. Claiming two tax allowances on your W-4 form is an option, but you risk having too little tax withheld from your pay.
To play it safe, couples can take a look at the tables under the Two-Earners/Multiple Jobs Worksheet that indicate which numbers to write down based on who has the highest- and the lowest-paying job. Those filing jointly can combine their income and submit a single tax form. If you’re the breadwinner and your spouse isn’t working, you can claim two allowances.
If you have dependents, your W-4 form will probably seem a bit trickier. There’s an opportunity to add additional allowances for being the head of your household, claiming the Child Tax Credit or using a credit because you have childcare expenses.
You could add an allowance for each of your dependents. That means if you’re married with two kids, you could claim two allowances on your form and get your spouse to do the same (for a total of four allowances).
Claiming Allowances for Itemized Deductions
Whether you plan on itemizing your deductions when you file taxes could also affect the number of allowances you claim. Taxpayers can claim additional allowances if they expect to have more itemized deductions than they had in the previous tax year. For example, you might be able to claim extra tax allowances if you want a tax write-off for making another charitable donation or for the property taxes you’re now paying for a house you recently bought.
How does a change in the number of itemized deductions you’re claiming have an impact on your withholding allowances? Deductions reduce your taxable income and affect the size of your final tax bill. If you can claim an extra allowance or two for your excess itemized deductions, you’ll be able to reduce the amount of money that the government withholds from each of your paychecks throughout the year.
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 or the IRA deduction.
Claiming an Exemption From Withholding
Are you asking yourself, can I claim an exemption from withholding? You can be eligible for an exemption if you owed zero taxes in the previous tax year and you received a refund for the federal income tax that was withheld. You can also claim exemption from withholding if you believe you have no tax liability whatsoever for the current tax year.
Students aren’t always exempt, especially if they have jobs. An exemption might be possible for those who work temporarily during their summer break or just part-time throughout the school year. The total number of allowances you’re claiming as a student would ideally be zero if your parents can still claim you as a dependent on their taxes and you don’t work. If you’re not a dependent and you’re a working student, you could claim two allowances like a single tax filer would.
The Takeaway
The total number of tax allowances you claim impacts the size of your paycheck. It also determines whether you receive a refund during tax season. Claiming too many allowances can have a lasting impact on your financial situation, especially if you’re required to pay the government some extra money. On the other hand, not claiming enough allowances reduces the size of your paycheck. That leaves you with fewer funds to put toward eliminating your debt or boosting your savings.
If you’re concerned about the amount of federal income tax that’s being withheld from your paycheck, refer to the withholding calculator provided by the IRS. Your W-4 form can be updated at any time, so you can make necessary adjustments throughout the year.
Tips for When You Have to File Your Taxes
Consider speaking with a financial advisor. Many advisors are tax experts and can help you figure out the best course of action for filing, especially if your tax situation is complicated. This quick survey can match you with an advisor in just a few minutes. You’ll answer about 20 questions about your financial situation and goals. Then the tool uses your specific information to sift through thousands of advisors to find as many as three who meet your needs in your area. Check out their profiles, interview them on the phone or in person and choose who to work with in the future.
How many tax allowances you claim impacts what you owe or what you get back at tax time in the form of a tax refund. If you get a refund, this money can go to financial goals – it can start or add to your emergency fund savings account (where depending on your bank, you can earn more than 1% in interest!) or put toward your retirement account at tax time.
Amanda Dixon
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