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Columns: Tax Talk
George Saenz, CPA   Expert: George Saenz, CPA
Tax Talk
How many deductions can be claimed on W-4?
Tax Talk

Determining withholding

Dear Tax Talk,
I am purchasing an apartment in New York City and need a large mortgage to pay for it. Because of this, my tax refund on the interest will be very large -- large enough to cover my taxes from my job. I have been told to claim nine deductions on my W-4, as my refund will cover my taxes. Is this allowed and/or recommended?
-- Daniel

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Dear Daniel,
Employees give Form W-4 to their employers to provide identifying information as well as to tell the employers how to withhold taxes from their paychecks. Withholding is based on marital status and withholding allowances. Form W-4 is given to your employer when you start work and can be updated at any time during your employment.

An employer is no longer required to send a Form W-4 to the IRS when an employee indicates more than a certain number of withholding allowances. Instead, the IRS will send an embarrassing letter to your employer if it finds you to be a chronic underpayer. In other words, you're free to do what you want; just don't embarrass yourself.

One withholding allowance is generally equivalent to a personal exemption. In 2008, a withholding allowance is equivalent to $3,500. An individual can estimate the total amount of their tax deductions, such as interest on a large mortgage for a small New York apartment, and translate the deductions into equivalent withholding allowances.

For example, $35,000 in mortgage interest would be equivalent to 10 withholding allowances. When you calculate your withholding allowances, you should also take into account income on which no taxes are withheld, other deductions, tax credits, job changes, second jobs, taxes withheld during the current year, bonuses on which a flat tax is withheld and a few other things.

Because all these variables are hard to take into account for the average human being on their first day of work, the IRS has developed the Federal Withholding Tax Calculator. Remember that your state withholding taxes are a function of your W-4. If your state's deductions vary from your federal deductions, you may want to consider additional withholding.

Bankrate.com's corrections policy -- Posted: June 19, 2008
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