Comments on: Adjusting Withholding via W4 Exemptions

By: Gary

Gary — Sun, 29 Mar 2009 21:36:16 +0000

Are we allowed to use any number of exemptions? Or is there some limit to how many you can take?? -Gary

By: thomas

thomas — Sun, 11 May 2008 20:25:59 +0000

I’m in a totally different position. Both my wife and I claim 0 and we still owe money. My wife is a teacher so she gets paid pennies, and is taxed in the lower bracket. However our income combined puts us in the 25% so I have to make up that difference come April 15th. I’m wondering if buying a house will actually save me the hassle of owing money, of course i’d still have to find a way to afford a house where I live.

By: F2O

F2O — Fri, 09 May 2008 15:30:49 +0000

Since I was married last Spetember, we just had to figure all this out ourselves for 2007. We did exactly what Brandon explained. I claimed the deduction since I am the higher wage earner, and she claimed zero. We ended up just a tad short and had to pay a little over $100.00.
BTW, I used the IRS calculator and plugged in all my numbers (my 9-5, her 9-5, plus both of our side incomes from teaching). We also made our w-4 changes in mid Jan. 07 since we knew that we would be filing jointly for 2007.

By: fred@opc

fred@opc — Thu, 08 May 2008 23:17:55 +0000

This is just one example of how the IRS withholding system is downright silly. Why are we converting mortgage interest paid into withholding allowances at strange rates (like $3400 per). The withholding system was invented before the myriad tax deductions and credits were put into place, and it needs to be fixed. They tried to make something “easy” for the average joe and they actually ended up making it far more complicated.

What’s even harder to calculate than a deduction is the effect of a tax credit (like the child tax credit or adoption tax credit). In this case, the taxpayer must contemplate their marginal tax bracket to back into the right math for the allowances. The whole concept is worth a post on its own.

So why is the withholding system setup the way it is: The original idea what that people would get allowances for themselves, their spouses, and their kids. Since these things didn’t change much, it was simple, just to “set it and forget it.” Even though your paychecks went up, you wouldn’t need to adjust your withholding frequently.

Nowadays, we have mortgage interest, child tax credits, energy credits, yada yada yada (TurboTax claims there are over 250 to choose from). For most of us, our tax situation changes every year, and we’re forced to address withholdings AT LEAST once every 12 months and sometimes more often. In worst case scenarios, we end up owing a penalty or giving the US Government a sizeable interest-free loan.

Fred
One Project Closer

By: djc

djc — Thu, 08 May 2008 18:59:39 +0000

For a married couple who both work, one person would claim 9, for example, and the other person zero, otherwise they would be underwithheld on the second job.

By: Brandon

Brandon — Thu, 08 May 2008 18:59:20 +0000

The W-4 form itself says:

“Two earners or multiple jobs. If you have a
working spouse or more than one job, figure
the total number of allowances you are entitled
to claim on all jobs using worksheets from only
one Form W-4. Your withholding usually will
be most accurate when all allowances are
claimed on the Form W-4 for the highest
paying job and zero allowances are claimed on
the others. See Pub. 919 for details.”

This is a good method because my wife is really “pro tax refund” where I see the fiscal problems with getting one back. Since I make more money, I can just claim a high number and let her claim 0.

What I do at the end of this period with any refund is up for grabs. I came up with a moderately complex algorithm that figured out what percentage of the taxes should have come from each individual and then divided up the refund the reimburse based upon the percentage of taxes paid by each individual and the percentage of income of each individual. I think it may be simpler to give it to my wife though unless I was mistaken when calculating the withholding and we got an obscene amount of money back.

Also, when I adjusted our withholding down, I started having the difference deposited into our savings account and earmark it as a “tax refund” account. At the end of the year, if we owe, I will pay from this fund and use the rest to pay down a credit card, put into normal savings, or spend.