Relationship Between W-4 Allowances & Tax Return Amount

Getting a big refund when you file your tax return is cool. Owing a big bill to the IRS is definitely not. That’s why Uncle Sam makes your employer withhold taxes from your paycheck. The W-4 allowances you claim affect the amount of tax taken from each paycheck and therefore the amount of any refund. By the time you get to the end of the year, you’ve already paid a whole lot of the tax you owe and maybe a little bit extra. Ideally, at year’s end, the amount you’ve paid is pretty close to the amount you owe.

Allowances and Exemptions

A W-4 allowance is a specific sum of money that your employer does not withhold income tax from -- the more allowances, the less income tax is withheld from your pay. The number of allowances is typically based on the number of personal exemptions you expect to claim on your income tax return. One personal exemption was equal to $3,800 in 2012. The amount exempted from your pay for each W-4 allowance depends on how long your pay period is. For example, if you are paid weekly, one allowance equaled $73.08 in 2012 -- that is, $3,800 divided by 52 weeks.

Figuring Withholding

In general, you are entitled to claim allowances for yourself, your spouse, and your dependents. Since each allowance reduces the part of your pay that’s taxed, less tax is taken out when you have more allowances. However, your total tax liability for the year does not change -- the allowances just enable your employer to withhold your taxes more accurately. Claiming the correct number of W-4 allowances means that at tax time you should expect neither a big refund nor a big tax bill.

Adjustments

The W-4 form also allows you to make other adjustments to your payroll tax withholding. For example, if you are entitled to claim the Child Tax Credit or Child and Dependent Care Tax Credit, you might add withholding allowances to adjust your withholding for these credits. The whole idea is to allow you as the taxpayer to customize your payroll tax withholding, so you pay close to the right amount of tax.

Limitations

Your W-4 allowances help your employer estimate how much you will owe in taxes, but it is only an estimate and does not take all possible factors into account. For instance, if you work two jobs or your spouse works, you might not have enough payroll taxes withheld even though you clam the correct number of W-4 allowances. The same holds true if you have a lot of investment income. If you want to make adjustments, you can submit a new W-4 form to your employer claiming fewer allowances or specifying an extra sum to be withheld to compensate for factors not included in the W-4 form. This will increase the amount of your refund or at least reduce what you owe.

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