Figuring out how many deductions to declare on the W-4 form you file with your employer can be tricky. Declare the wrong number and you could end up owing taxes when you file your federal return. Luckily, you can use an online calculator to help you determine the right number of deductions. Although it may be tempting to take as many as eight, you should only do so when you know it’s the best choice for your financial situation.
TL;DR (Too Long; Didn't Read)
Generally speaking, an increase in the number of W-4 deductions will decrease the amount of tax taken out of your paycheck. You can calculate the scope of your withholding using various IRS calculator tools.
Importance of Updating Your W-4
Even though your family and financial situation may not have changed, the IRS recommends that every employee check and possibly refile their W-4 each year in case recent tax law changes have had an impact. If your paycheck is for regular wages, you are not allowed to claim a percentage of your wages or a flat sum for your withholding. Instead, you must claim a certain number of allowances, or deductions, which will then be used to determine your projected tax liability. Once you have claimed allowances on the W-4 form, you are allowed to specify an additional amount you want withheld from each paycheck on the next line of the form.
Determining Personal Deductions
You can use the worksheet provided with Form W-4 to calculate the number of deductions you should claim. Besides declaring deductions for yourself and your spouse, the worksheet will help you determine how many deductions to take if you are eligible for certain tax credits, such as the child tax credit. It will also help you use your projected income to determine how many deductions to take for your other dependents.
How Many Deductions Is Too Many?
Claiming eight deductions on a W-4 is not an unusual situation. For example, if you are married with two children, you might claim one allowance for yourself, one for your spouse, two for your children and four as part of the child tax credit, for a total of eight deductions. In many cases, having this many deductions could result in little or no taxes being withheld from your paycheck. In this situation, you should be sure that you won’t be subject to an IRS penalty if you end up owing taxes based on all your forms of income.
Using the IRS Calculator
You can use the IRS calculator to more exactly determine the correct number of allowances to claim on your W-4. This tool is especially useful if you have a more complex tax situation, such as multiple employers or if both spouses employed. You’ll need recent pay stubs and your most recent income tax return. You will also find similar calculators on the websites of some financial institutions and tax-preparation companies. To change your withholding, simply submit a new W-4 to your employer.