Because the federal income tax is a pay-as-you-earn deal, you have the opportunity to adjust your withholding with your employer throughout the year.

If you got a big refund last year and your income and deductions are basically the same, you probably are having too much money withheld. That also could be the case if your income is about the same as last year, but you now have more deductions or credits.

On the other hand, you might not be having enough taxes withheld if you have a second job, your spouse works or you have other income not subject to withholding.

The basic W-4

The more allowances you claim on your W-4, the less income tax will be withheld. You will have the most tax withheld if you claim zero allowances.

To help you determine the correct number of allowances, you need to complete the eight-line worksheet that’s atop the actual form you file. The worksheet questions take into account the number of dependents you have and whether you have a second job or working spouse. You can make these calculations online with the IRS’s interactive W-4 worksheet.

If you have only one job, are single or your spouse doesn’t work, or any second income is less than $1,000, then the W-4 process is fairly simple. You get one allowance for yourself, your spouse and one each for your children or other dependents.

Next, you take into account your filing status. If you file as head of household, you get an extra allowance. You also get allowances for child or dependent-care expenses of more than $1,500 a year, as well as additional allowances for any child tax credits you take.

The total of all these considerations is the number of allowances you put on your W-4 to get an accurate amount of pay withheld. Don’t be surprised if this number of allowances is not the same as the actual exemptions you claim when you file your return in April. There may be a difference because you’re figuring the credits and expenses upfront rather than subtracting them at the end, as you do when you file.

If your life gets a bit more complicated, so does the tax paperwork you have to fill out. If you itemize your deductions or have a working spouse, you need to fill out the two worksheets that accompany the W-4.

Deductions and adjustment worksheet

You will want to reduce your withholding if you itemize deductions. These expenses, detailed at filing time on Schedule A, generally mean your tax bill will be smaller. The first W-4 worksheet will help you determine just how much smaller. You’ll then account for that amount in your withholding by claiming the appropriate number of allowances.

Most common deductions and adjustments
  • Mortgage interest
  • Real estate taxes
  • State and local taxes
  • Student loan interest
  • Alimony payments
  • IRA contributions
  • Gambling losses
  • Medical and dental expenses (must exceed 7.5 percent of your adjusted gross income)
  • Charitable contributions and gifts
  • Casualty and theft losses

The worksheet also will consider any other income you might have, such as dividends and interest, as well as adjustments to your income. These adjustments, popularly called above-the-line deductions, are claimed directly on your Form 1040 or 1040A. They include alimony you paid, deductible IRA contributions you made or student loan interest you paid, and also need to be taken into account when determining your correct number of withholding allowances.

When you arrive at the worksheet’s additional number of allowances, you’ll add these to the number you figured on your basic personal allowance worksheet on page 1. This total then goes on the new W-4 you give your boss to adjust your withholding.

Dual-income worksheet

If you have two jobs or your spouse works, you might need to make further withholding adjustments to ensure that you have enough taxes withheld. The second W-4 worksheet takes this added income into account.

If you used the worksheet because your spouse works, be sure to discuss any changes you make on your W-4 with your husband or wife. His or her paycheck should be adjusted, too. The IRS recommends that in two-paycheck families, all the allowances that result from this worksheet be claimed by W-4 for the highest-paid job and zero allowances for the other.

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