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The situation with W-4 form is as following -
The larger number of allowances you are using on the W-4 form - the less withholding.
Actually, each allowance is equivalent of $3,800 in additional deductions.
By declaring 99 allowances - you effectively telling that you expect deduction in about $380,000 - that might not be correct.
If you do not expect any tax liability - you may use "EXEMPT" but need to varify your qualifications.
If you provide additional information about your income, filing status, deductions, etc. - I will help to estimate your tax liability and withholding.
Customer: I'm sorry, I don't get the $380K deductions. And, "less withholding?" from where? Regular salary?
Joint income is approx - $40 - $50K this year. Filing status - married filing jointly.
Lev: "I'm sorry, I don't get the $380K deductions."
If you do not have such deductions - you should not claim 99 allowances on your W-4 form - but the number of allowances should correspond with your expected deductions.
"And 'less withholding' from where? Regular salary?"
Yes - the W-4 form affect withholding from your regular wages - not supplemental wages. Actually W-4 forms instruct the payroll person what amount should be withheld for income taxes - federal and state. There are special withholding tables.
Customer: Deductions? What would that be? We just sold our house and took home about $50K; currently living in an apartment so no mortgage and property tax to pay; no plans of buying a house any time soon. What other deductions would qualify?
Lev: $40 - $50K this year - is that your only income or both spouses are working?
Customer: By the way, I have 1 dependent - my 16-year old daughter. I have another daugher, 21 this month, and has filed her taxes since 2 years ago. 40-50K is joint income. It can go up a little more, if ever; but depending on projecting coming. I have a regular job and I do freelance as well.
Lev: So, you only have one or two dependents?
Customer: I only declare 1 which is my 16-year old.
Lev: Let me just estimate your tax liability.
Assuming Adjusted Gross income (AGI) $50,000 - assuming wages only.
Standard deduction - $11,900
Personal exemptions $11,400 - including you, your spouse and your daughter
Taxable Income - $26,700
Regular tax - $3,135
Child tax credit - $1000 - for dependent below 17
Tax after credits - $2,135 - that is your estimated tax liability
Customer: Tax liability - meaning, what I might pay the IRS at tax year 2013?
So, did my accountant suggest for me to put 99 on Line 5 so that I will have more withheld from regular salary and so I don't have to pay that much by the end of the year?
Lev: What you might owe or if you will get a refund - depends on your withholding. That is your estimated tax liability without withholding.
Customer: By the way, I missed to say earlier that on Line 6, she asked me to put 83 if our payroll is bi-monthly, so 160 if monthly I guess. I believe that Line 6 is the withholding?
Lev: One Line 6 form W-4 is an additional dollar amount you want to withhold - http://www.irs.gov/pub/irs-pdf/fw4.pdf
The number of allowances is reported on Line 5.
Customer: So, going back, with the 99 allowances and 160 every paycheck/monthly - does that make my payments for taxes even out so that I may not owe much to federal at the end of the year of taxes?
Lev: Because both - you and your spouse are working - you need to check on W4 "Married" - but withhold at higher "Single Rate".
Each should use TWO allowances.
Plus - you may ONE allowance for your dependent daughter and TWO additional allowances if she is below 17 on last day of the rear (to reflect child tax credit).
"So, going back, with the 99 allowances and 160 every paycheck/monthly - does that make my payments for taxes even out so that I may not owe much to federal at the end of the year for taxes?"
That will be actually a "trick around the withholding system" - and result in $160*2=$3,200 in withholding.
Customer: $3,200 withholding, meaning, may be refunded to me or not, depending on how much I will end up paying Federal? Also, which part of the W-4 will I put "married", but withhold at a higher "Single Rate"?
Lev: Will your daughter be 16 on December 31, 2013?
Customer: No, 17 by the end of the year. Her birthday is ***** November.
Lev: "Also, which part of W-4 will I put "married", but withhold at higher "Single Rate"?
See from here - http://www.irs.gov/pub/irs-pdf/fw4.pdf - that is on Line 3.
Customer: Okay - so with these suggestions, you are saying to put 99 is wrong?
Lev: "No, 17 by the end of the year. Her birthday is ***** November."
That means - you will not have child tax credit for her in 2013. And your estimated tax liability would be $3,135.
"Okay - so with these suggestions, you are saying to put 99 is wrong?"
Yes - you may not report 99 allowances because you do not expect such large deductions.
Customer: So, what should I put in allowances? Sorry, I am now getting confused. Is the 83 okay? I mean the 160 per monthly paycheck?
Lev: "So what should I put in allowances?"
Because both - you and your spouse is working - you need to check on W4 form "Married, but withhold at higher Single rate"
Each should use TWO allowances.
Plus - you may ONE allowance for your dependent daughter - may be used by either you or your spouse.
"Is the 83 okay? I mean the 160 per monthly paycheck?"
If you are using the number of allowances correctly - you do not need any additional withholding.
Customer: So, to clarify further, if I pursued putting 99 for allowances, what would that mean by the end of the year? I mean, what are the consequences in terms of my tax filing?
Lev: "So, to clarify further, if I pursued putting 99 for allowances, what would that mean by the end of the year? I mean, what are the consequences in terms of my tax filing?"
That will not affect your tax filing and your tax liability - that will only affect your withholding. By declaring 99 allowances - you effectively telling that you expect deductions to equal about $380,000. The result of declaring 99 allowance will result NO income tax withholding.
Cusotmer: Again, withholding, meaning from regular salary, right?
Lev: Yes - from regular wages.
Customer: Okay, I just pulled up the form - I saw Line 3 - Married, but withhold at higher single rate. I don't understand though what I will put then on Line 5.
Lev: If you have supplemental wages - such as bonuses, or other one time payments - withholding is generally 25%.
Customer: No, not my regular job. I have no supplemental wages in my regular job.
Lev: Okay, I just pulled up the form - and I saw Line 3, married, but withhold at higher single rate. I don't understand though what I will put then on Line 5."
Each should use TWO allowances. Plus - you may allow ONE allowance for you dependent daughter - may be used by either you or your spouse.
Customer: So, I can do 3 for my Line 5; and 2 for my husband's Line 5?
Lev: That would be the correct way of using W4 form in your situation.
Customer: Going back to withholding of 25%, so I will have none of that because I don't have supplemental wage, right?
Lev: That is correct.
Customer: Actually, neither will my husband because he doesn't have supplemental wages as well. Wait, what about director's fee? Is that considered a supplemental wage?
Lev: That depends on the payer. If it is paid every pay period - that is a regular wage. But, if paid ones per year - that might be a supplemental wage.
Customer: Not regular, but can also be none in one year. Last we had was 2 years ago, I think. Finally, just out of curiosity, would 99 allowance then be more practical if I still owned a house? My mortgage then was definitely more than $3K a month; with property taxes, about $4K/month.
Lev: By declaring 99 allowances - you effectively telling that you expect deductions in about $380,000 - which is NOT correct. The only purpose for that is to "trick" the withholding system and not to have any withholding.
If you were owned the house - and if you itemize your deduction - you should use ONE additional allowance for each $3,800 in deductions above your standard deduction.
So in this case - you need to estimate your itemized deduction, subtract the amount of standard deduction and divide the result by $3,800 - that will be the number of additional allowances which should be divided between you and your spouse.
So assuming your itemized deduction would be $30,000 (that includes mortgage interest, property and real estate taxes, state taxes, charitable contributions, etc.) - that might result 4 or 5 additional allowances which must be divided between you and your spouse.
Customer: Now that I don't own a house, I don't think I would have any qualified deductions. What would be qualified deductions for a non-homeowner?
Lev: Most likely - you will use standard deduction and personal exemptions. Standard deduction - $11,900
Personal exemptions $11,400 - including you, your spouse and your daughter.
Customer: Okay. By the way, in filing taxing - is it important to use the same address in 1040 and W-9 and W-4? I plan to get a P.O. Box for my business (sole proprietor) and will be using for my clients and vendors. Of course, I'd have to give clients my W-9 also through course of dealing with them. Can I put my P.O. Box in my W-9? But, then since me and my husband are filing taxes, obviously we use our home address for that. Will that be a problem?
Lev: You may use ANY address including a P.O. box. There is no law to require any specific address to be used. That is your choice.
Customer: Okay, thanks. You've been a great help!
Lev: You are welcome.