IRS Form W4: How Many Allowances Should I Claim?

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IRS Form W-4: How Many Allowances Should I Claim?

The answer to this question will affect both your paycheck and next year's tax refund, so it's important to get this tricky number and your withholding right.

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My son recently sent me a text asking, "Is it better to claim 1 or 0 allowances?" He was starting a new job that day, so I instantly knew he needed guidance on how to fill out a W-4 form. That's the IRS form you use to let your boss know how much federal income tax to withhold from your paycheck.

SEE ALSO: Easy-to-Use Tax Withholding Calculator

For such a short form (it's less than half a page long), the W-4 can create an awful lot of stress and confusion. It starts off easy enough – name, address, Social Security number, filing status. But then you get to line 5. That's where you have to report the total number of allowances you're claiming. (That's also when you get that puzzled look on your face and ask yourself, "what's an allowance?") You sense that it's an important question – and you're right. Whatever number you write on line 5 will have a significant impact on both your paycheck and your next federal tax return. But figuring out the right number of allowances for you can be tricky. That's why it's important to understand how allowances work and how to calculate them.

But don't worry…we've got your back! We provide the basics you need to know when it's time to fill out your next W-4, and we also have an easy-to-use withholding calculator to help you figure out how many allowances are right for you. Hopefully, the information below and our handy tool will help reduce some of the angst and uncertainty often associated with the W-4 form.

Are You Exempt From Withholding?

First of all, you're exempt from federal income tax withholding altogether if you had no federal income tax liability last year and you also expect to have no tax liability this year. That'll save you the hassle of having to file a return next year just to get a refund of any income tax withheld from your pay. You still have to give your employer a W-4 form to claim the exemption, but you don't have to worry about the nuts and bolts of claiming allowances on the form.

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An exemption is good for only one year, though. So you have to give your employer a new W-4 form by February 15 each year to extend your exemption.

Why Withholding Allowances Are Important

If, like most of us, you're not exempt from withholding, the allowances you claim on your W-4 control how much federal income tax is withheld from your paycheck. If you claim more allowances, less tax is withheld (so you get a bigger paycheck). If you claim fewer allowances, more tax is withheld (so your paycheck shrinks). However, you can't claim fewer than zero allowances.

SEE ALSO: 20 Most-Overlooked Tax Breaks and Deductions

Since allowances impact withholding, they also affect the amount you have to pay the IRS or the size of your refund when your file your next federal tax return. That's because the total amount of federal income tax withheld from your wages during the year is subtracted from the overall tax liability shown on your return. The more tax withheld, the less you'll have to pay to the IRS or the larger your refund will be on your next return. Conversely, if less tax is withheld, you'll have to pay more or you'll get a smaller refund.

Effect of Adding or Reducing Withholding Allowances

More AllowancesFewer Allowances
Less Tax WithheldMore Tax Withheld
Larger PaycheckSmaller Paycheck
Smaller RefundLarger Refund
Larger Tax PaymentSmaller Tax Payment

Playing it out one more step to connect allowances to refunds or the amount of tax owed next April 15: More allowances will reduce your refund or increase the amount you owe, while fewer allowances will increase your refund or lower the amount you owe. Got it?

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How to Calculate Withholding Allowances

The W-4 instructions have three worksheets to help you determine how many withholding allowances you can claim. (Don't give the worksheets to your employer.) The goal is to select the number of allowances that will result in total withholding for the year being as close as possible to your tax liability for the year. So, if you follow the worksheets, the refund or the amount you owe on your next tax return should be relatively close to zero.

Everyone should complete the Personal Allowances Worksheet first. If your tax situation is fairly simple, that's all you'll need to do to figure the total number of allowances to claim. This worksheet calculates allowances based on your filing status and number of jobs. It also converts tax credits to withholding allowances.

SEE ALSO: 18 Red Flags for IRS Auditors

If you expect your next tax return to be more complicated, then you might want to complete the Deductions, Adjustments, and Additional Income Worksheet, too. Use this worksheet to increase allowances/reduce withholding if you plan to itemize deductions or claim certain income adjustments, the qualified business income deduction or additional standard deductions for age or blindness on your next tax return. You can also use this worksheet to decrease allowances/increase withholding from your paycheck if you have a large amount of nonwage income, such as interest, dividends, rental income, unemployment compensation, gambling winnings, prizes and awards, hobby income, capital gains, royalties or partnership income.

If you (1) have more than one job at a time or (2) file a joint return and both spouses work, you can also complete the Two-Earners/Multiple Jobs Worksheet to refine your withholding. However, only use this worksheet for 2019 withholding if the combined earnings from all jobs are more than $53,000 ($24,450 for joint filers).

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There are also a few other worksheets in IRS Publication 505 to help certain employees calculate allowances, but most people won't need to use them. You can also use the IRS's withholding calculator or an alternative method to determine the number of withholding allowances to claim. However, if you don't use the W-4 worksheets to calculate allowances, you still need to give your employer a W-4 form to actually claim them.

Tip for Married Couples: If both you and your spouse are employed and expect to file a joint return, figure your withholding allowances using your combined income, adjustments, deductions and credits. Use only one set of worksheets. You can divide your total allowances any way, but you can't claim an allowance that your spouse also claims. If you and your spouse expect to file separate returns, figure your allowances using separate worksheets based on your own individual income, adjustments, deductions and credits.

Tip if You Have Multiple Jobs: If you have income from more than one job at the same time, complete only one set of worksheets. Then split your allowances between the W-4s for each job. You can't claim the same allowances with more than one employer at the same time. However, you can claim all your allowances with one employer and none with the other(s), or divide them any other way that accomplishes your withholding goals.

Withholding Additional Amounts

If you're already at zero allowances but still want to increase the amount of tax withheld on your paycheck – to account for nonwage income not subject to withholding, for example – you can request an additional amount to be withheld from each paycheck on line 6 of your W-4 form. Use Worksheets 1-3 and 1-5 in Publication 505 to see if this is a good idea for you.

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Do You Really Have to File a W-4?

No, you aren't required by law to fill out a W-4 form. However, if you don't, your boss is automatically going to withhold tax from your paycheck as if you're single and claiming no withholding allowances, which is the highest withholding rate.

Can You Just Pick Any Number of Allowances?

You can claim fewer withholding allowances than you're entitled to, but you can't claim more. The IRS can hit you with a $500 civil penalty if you claim allowances with no reasonable basis to reduce the amount of tax withheld. You could also face criminal charges for supplying false or fraudulent information on your Form W-4. If convicted, you could be fined as much as $1,000 and/or thrown in jail for up to a year.

SEE ALSO: 10 Tax Breaks for the Middle Class

You won't be penalized for a simple error or an honest mistake on your W-4, though. For example, don't worry if you try to figure the number of withholding allowances correctly but end up claiming six when you're actually only entitled to five.

Part-Year Employees

Although it's not included on the W-4 form, there's a helpful withholding wrinkle for people who don't work all year (say, for example, you graduate from college in May and start your first job in July). It's called the part-year withholding method, and it allows less tax to be withheld from your paycheck than would be withheld if you worked all year. To be eligible, you can't expect to be employed for more than 245 days during the year, which is about eight months. (So you aren't eligible if you begin working before May 1 and expect to work for the rest of the year.) You also have to ask your employer to use the part-year method – and your boss can say no.

When to Fill Out a New W-4

The W-4 isn't a one-and-done form. You'll certainly have to fill one out each time you get a new job. But you should also at least check your withholding annually to make sure you're where you need to be – especially if there are significant personal or financial changes in your life, such as getting married or divorced, having a baby, your spouse starting (or stopping) work, receiving a big raise and the like. If you need to make a change, simply give your employer a new W-4 claiming the revised number of withholding allowances. It's also easier to get the right amount of annual tax withheld if you do this earlier in the year.

You should also revisit your withholding if you owed a large amount or received a large refund on your last tax return. Ideally, you want your annual withholding and your tax liability for the year to be close, so that you don't owe a lot or get back a lot when you file your return. (Remember, a large refund just means you gave the IRS an interest-free loan.) But if that's not the case, there's an easy way to see how you can get back on track. Kiplinger has created an online tool that will quickly and easily show you how many more or fewer withholding allowances you need to achieve a better-balanced tax return next year. From that point, it's just a matter of filling out a new W-4 for your employer. It only takes a few seconds to use the tool – so check it out now!

SEE ALSO: 8 Ways You Might Be Cheating on Your Taxes