New home means withholding changes

Dear Tax Talk,
I am in the process of looking for a home. Can I adjust my withholding tax, currently at single with one allowance, to compensate for income and tax purposes? For example, can I increase my withholding to single with four allowances to have that money available to me? If this is possible, I would like to figure out how much I can increase my withholding. Is there a calculator that does this for you?
-- Marci

Dear Marci,
By increasing your withholding allowances, you're increasing your take-home pay, which could help you cover your mortgage payment. Since the interest on the mortgage and real estate taxes are deductible, this is similar to additional withholding allowances.

Your current one dependent is equivalent to your personal exemption, which is $3,050 in 2003. In other words, a withholding allowance is equivalent to $3,050 in deductions. In 2004, after adjusting for expected inflation, each additional withholding allowance will be equivalent to $3,100 in additional deductions.

Since a single taxpayer automatically receives the standard deduction of $4,750, this is already built into the tax withholding tables and therefore does not translate into additional withholding allowances. Interest, real estate taxes and other itemized deductions can be taken in lieu of the standard deduction. When you figure how much in additional deductions you'll have, you will have to back out the standard deduction that is already built into the withholding tables. An example at this point would be probably helpful:

• Assume you'll pay $1,000 a month in taxes and interest on your new house.
• You'll also have $3,500 in other itemized deductions, such as charity and state income taxes.
• Therefore, your total anticipated 2004 itemized deductions are expected to be $15,500, which is equivalent to five additional withholding allowances.

But it's not quite that simple. Your five additional allowances need to be scaled back for the standard deduction that is included in the withholding tables. You would do this by reducing your withholding allowances by one or two, depending on how close you want to cut it at tax time.

Based on this example, you could claim four or five withholding allowances on your 2004 Form W-4 to help you cover that mortgage payment. You can use the Internal Revenue Service's online withholding calculator to help you figure your allowances. You might need to wait a few weeks to use it, however, as the IRS still is calculating for 2003 Form W-4 purposes.