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Christopher Phelps
Christopher Phelps, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 2710
Experience:  CPA, CFP, PFS, Tax Practitioner 21 Years, Member AICPA/CSCPA Tax/Financial Planning Committee Member
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How much money is each tax exemption on the W2?

Resolved Question:

I'd like to know the approximate money difference between claiming 2 or 3 exemptions on the W2 form.

Submitted: 11 years ago.
Category: Tax
Expert:  Christopher Phelps replied 11 years ago.
How much is your taxable pay (i.e. gross less medical & 401(k)) per pay period? Are you paid weekly, bi-weekly, semi-monthly or monthly? Are you claiming single or married? What is your current Federal w/h?
Customer: replied 11 years ago.

Gross pay is approximate $2,230 and is bi-weekly. Medical is on a pretax basis. No 401K at this job yet, just started. Claiming single, one child, head of household. My prior job I only had 2 exemptions and made much less. Now I make more and claimed 3 because I'd rather the money now, just don't want to end up paying a lot at tax time. Based on the salary, can you give me an idea what the difference would be between 2 and 3 exemptions?
Thank you.

Expert:  Christopher Phelps replied 11 years ago.

Going from 3 to 2 exemptions will increase your Federal withholding by about $31. This is approximate because different employers calculate w/h differently, but will generally be within $5 one way or the other. On a 26 pay period year that difference amounts to about $800.

I took the liberty of estimating your tax liability for a full year of employment. Assuming you earn gross annual taxable wages of $57,980 (i.e. $2,230*26) and assuming you will take the standard deduction for 2005 of $7,300 and personal exemptions of $6,400 (2*$3,200), you will have taxable income of $44,280. The head of household schedules indicates your initial Federal tax liability will be about $6,600. Assuming you are eligible for the child tax credit (i.e. $1,000), that liability will be reduced to about $5,600. Your Federal withholding with 3 exemptions should be about $315 ($346 with 2 exemptions) per pay period for an annual total of about $8,190 ($8,990 if 2 exemptions). Thus, you appear to be in line for a significant refund assuming you have no other taxable income.

If I were you I would consider at a minimum, maintaining your exemptions at three. You might even consider upping the exemptions to 5 which would result in Federal withholding of about $253 per pay period for an annual total of $6,590, which is still $1,000 above your projected liability. Also, you may be eligible for the dependent care credit if you pay for child care so you can work. See form 2441 at http://www.irs.gov/pub/irs-pdf/f2441.pdf. If you paid at least $3,000 for child care (and you were not reimbursed by your employer or otherwise received Sec. 1125 benefits) you may be eligible for an additional $600 credit.

I also suggest you fill out a W-4 (http://www.irs.gov/pub/irs-pdf/fw4.pdf). Filled out properly you will see that you are entitled to 5 personal allowances (i.e. 1 for yourself; 1 for being single with 1 job; 1 for your dependent; 1 for filing as HOH; 1 for the child tax credit).

Because it is impossible for me to identify and consider ALL the relevant facts, this advice is not intended or written to be used for the purpose of avoiding penalties, and cannot be used for that purpose.

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