I've heard from many of you that this previous post didn't give you the information that you were looking for. So, let me offer my apologies and try to do a better job of it this time.
I am not a tax planner, or tax specialist, so PLEASE consult with a professional if you have questions.
Now, with that out of the way, let's see how having too many or too few allowances can effect your withholding.
How many W4 allowances do you claim?
Are you getting a refund from the IRS this year? If so, you're having to much money withheld from your paycheck. For some people with cash flow problems, adjusting your W4 allowances is a great way to get more cash into your pocketbook each payday to help with those cash flow problems.
The IRS has a worksheet that will help you calculate how many allowances you can take. Just follow this link to the worksheet.
Another great way to do some what if scenarios is by using one of the many free calculators like this one at H&R Block
What happens if you claimed just two allowances on your W4, when in real life you have four, and you claim those four allowances when you file your taxes? Chances are you would get a refund.
As I wrote in my first post about how many allowances you should take, the simple answer is not too many, and not too few. If you have too few, then you're getting more money in your paycheck each pay period. If on the other hand you're paying into the IRS, then you have too many allowances. Remember, the BIGGER the allowance number, the bigger the paycheck. The smaller the allowances, the smaller the paycheck. If your allowance number is too big, then you'll pay in to the IRS. If your allowance number is too small, you'll likely receive a refund from the IRS.
If you want to increase your take home pay, increase your allowances. If you want to increase your refund, decrease your allowances.
Now, keep in mind that if you want to increase your take home pay by increasing your allowances, BE VERY CAREFULL! If you claim too many, you could end up paying in at the end of the year.
Your goal for changing your allowances should be easy. You should be paying what you owe; not any more, and not any less.
Here are a few more resources that I hope you find helpful:
How to adjust your withholding - Kiplinger
Exemption Allowance Amount - H&R Block
Tweak Your Income Tax Withholding - About.com
Adjust your withholding so you don't get a big refund - Bankrate.com
Paycheck Calculator - Paycheck City
Tuesday, February 5
UPDATED- How many allowances should you claim on the W4?
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4 Comments:
Another note on this is that if you take too many allowances and owe the IRS too much money at the end of the year, you could get hit with a penalty. This is pretty crummy since you can't charge them a penalty (interest) if your refund is really big!
You're absolutely right, thanks for pointing this out Becky! Wouldn't it be nice if we COULD charge interest for the money that we lend the IRS? Maybe you're on to something here! Thanks for visiting and leaving your comment!
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"If you have too many, then you're not getting as much money in your paycheck each pay period, instead you're receiving it in a lump sum refund from the IRS. If on the other hand you're paying into the IRS, then you have too few allowances."
This is exactly backwards - if you have too many allowances then your paychecks will be too big, likely resulting in taxes owed. If you have too few allowances, you're likely getting a refund.
BUT the next sentence is correct and a good summary:
"Remember, the BIGGER the allowance number, the bigger the paycheck. The smaller the allowances, the smaller the paycheck."
Anyway thanks for the links to some tools to help figure out how I should adjust my number - quite helpful.
Thanks for pointing this out Kristina! I'm not sure what happenend there, but we'll fix it immediately!
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