How to Calculate W-4 Exemptions

When you start a new job, your employer will have you fill out a W-4. A W-4 lets your employer know how much in taxes to withhold from your paycheck. Many workers fill out their W-4 at the start of their employment, then never take another look at it. If your situation hasn’t changed, then this is fine; however, if your marital status changes or you have a new addition to your family, review your W-4 and make any necessary adjustments to ensure you’re having the appropriate amount of taxes withheld.

The IRS has so many forms and terms associated with filing taxes, that it's easy to be a little confused. The terms exemptions and allowances are often used interchangeably, when in reality, they’re similar in some respects, but are not the same. This is due in part because both exemptions and allowances can be claimed for you, your spouse and each of your dependents, but this is where the similarity ends.

You do not calculate exemptions on IRS Form W-4, Employee's Withholding Allowance Certificate, but rather on your IRS Form 1040, U.S. Individual Income Tax Return, when you file taxes. On your 1040, you are allowed one exemption for yourself, your child and each eligible dependent you have for tax years 2017 and prior. The number of exemptions you claim directly reduces the amount of income you’re taxed on, which lowers your overall tax obligation. Depending upon your personal situation, the number of exemptions you take on your 1040 can also coincide with the number of allowances you claim on your W-4 – but they also may not. Because of recent tax reforms, there are no personal exemptions for tax years beginning with 2018.

When you fill out your W-4 at the start of a new job, or whenever your personal situation changes such as getting married or having another child, you are allowed to claim allowances. These allowances do not impact your tax obligation, however, they do impact your paycheck every pay period. The number of W-4 allowances you claim affects the amount of federal income taxes withheld from each paycheck. Like exemptions on your 1040, you’re able to claim allowances for you, your spouse and qualifying dependents. But, unlike exemptions on your 1040, you can claim other allowances on your W-4 depending on if you file head of household, if you’re planning to itemize or if you’re going to claim the child tax credit or the child and dependent care credit.

The more allowances you claim on your W-4, the more money you will take home each pay period because less taxes will be withheld – but you could be hit with a large tax bill at tax time. Many taxpayers opt for having less taxes withheld from each paycheck so they have more money at their disposal, while others prefer to have the maximum withheld in anticipation of a larger refund. There is no right or wrong number of allowances you should claim on your W-4; as long as you’re eligible to claim them, you can take as many allowances as you want. However, you do need to keep in mind that having too few taxes withheld can be problematic at tax time.

Attached to your W-4 form is a Personal Allowances Worksheet. This worksheet helps walk you through determining how many allowances you can claim. Lines A through G let you enter a “1” on every line that is applicable to you. On line H, you total the numbers from lines A through G to determine your total number of federal withholding. You then enter this figure onto line 5 of your W-4.

It is worth noting, just because you are eligible to claim a certain number of allowances, doesn’t mean you have to. You can decide how many allowances you claim based on whether you’d like a larger refund at tax time, or want more take-home pay each pay period. The IRS’ website has a wealth of information for helping taxpayers determine their allowances. You can also consult with a qualified tax professional for more guidance on your best course of action.