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?
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.