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Dorothy Rosen -- The Dollar Diva Ask the Dollar Diva

Figuring personal allowances

Dear Diva,
I am now filing married with four exemptions on my W-4 form and got back $4,000 from the IRS this year. How many exemptions should I take to break even? I want to pay my fair share of taxes, but I don't like giving an interest-free loan to Uncle Sam every year.

Dear Patrick,
Life was so simple when folks just had to claim exemptions. The typical family of four had a working husband, stay-at-home mom and two children. The mister claimed four exemptions on his W-4, and broke even at tax time. Welcome to the future.

Exemptions have been replaced with personal allowances, and the tax code has grown so complicated you need a crystal ball to figure out how many personal allowances you can claim without getting into trouble. The number of allowances will go up or down depending on your:

  • Filing status
  • Working spouse
  • Number of children and other dependents
  • Number of jobs you and your spouse have
  • Child or dependent care expenses
  • Tax credits for children and education
  • Itemized deductions
  • Student loan interest
  • Alimony
  • Interest, dividends, capital gains
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And that's only a partial listing. But don't panic; help is on the way. It's called the IRS W-4 (2001) Personal Allowance Worksheet. The IRS developed this interactive, online calculator to walk the harried taxpayer, step-by-step, through the personal allowance maze. It's a good calculator, but be careful.

The first year you change your allowances can be dicey. You're using an IRS calculator, not a crystal ball; the number it spits out isn't magic. And if it looks too good to be true, it might be. Rework the online worksheet, and if it still looks out of line, manually do the computations on the worksheet printed on Form W-4 Employees Withholding Allowance Certificate.

If you find your paychecks are a few hundred dollars heavier each month after you change your withholding allowances, put some aside just in case. You don't want to keep giving Uncle Sam a huge interest-free loan every year, but you don't want to find yourself scratching for cash at tax time if the allowances were more than they should have been.

-- Posted: June 21, 2001

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See Also
Understanding the W-4
Deductions and credits
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