This article has been updated to reflect 2018 withholding information here: How Many Allowances Should I Claim on 2018 Form W-4?
A frequent question that comes up when you’re starting a new job and filling out the mountains of paperwork and forms that come with your new role, is “How many W-4 allowances should I claim?” This question is usually followed by many more questions, each more detailed and complex than the previous.
Sam Kerch, of AskCPASam, was recently asked this question: Can a person claim more dependents or allowances on their W-4 in order to increase take-home amount and then declare an accurate number on 1040? If over payment is expected, and then a refund is due, can he simply handle it this way and get the cash during the year instead of as a refund? Is this legal?
Sam answered that there are really two ways to look at this question:
- Dependents claimed on your tax return are often not the same as allowances on the Form W-4. Allowances on the W-4 are designed to reduce your income by the amount of non-taxable income calculated on your tax return. For instance, a single person not supported by someone else who has one job and rents an apartment alone with no investment income or self-employment income would be allowed to claim a dependent allowance for themselves on the 1040 form. They would also be allowed to claim a standard deduction. For 2015, the standard deduction is $6,300 for singles. The allowance value is $4,000 for 2015. For this scenario, the individual would claim ($6,300+$4,000) $10,300/$4,000 or 2 allowances on a W-4 form. For those who itemize and have additional dependents, the calculation still requires someone to determine the income not subject to tax (itemized deductions, student loan interest, dependents, etc.) and divide it by the value of an allowance. The object is to get your tax withholding from your paychecks to match what you actually owe which is calculated on your 1040 Form. You don’t want a big refund, and you definitely don’t want to have a big additional tax bill!
- Following the logic of the last sentence of option 1, if you decide to claim more allowances than are valid for your situation, you will end up not paying enough tax through withholding for the year. This is not a smart move, and could subject you to underpayment penalties, and even interest! While a case could be made that it is legal, you must verify when you submit a W-4 to your employer that the number of allowances you are claiming is valid for your situation under penalty of perjury. If you are intentionally claiming too few allowances, you are lying and opening yourself up to some pretty severe potential penalties.
The key thing to remember, is that while it’s not fun to pay taxes, it is the law. Proper management of your withholding will keep the money that is yours in your pocket instead of providing an interest-free loan to the government. It will also keep you from paying even more in penalties. That’s really not fun!
These free resources should not be taken as tax or legal advice. Content provided is intended as general information. Tax regulations and laws change and the impact of laws can vary. Consult a tax advisor, CPA or lawyer for guidance on your specific situation.