When you went to work for your employer you filled out a W-4 form, which let your payroll department know how the number of allowances your were claiming. This number has a direct impact on the amount of money taken out of your paycheck to pay your state and Federal income taxes. Generally, every time you experience an event like getting married, having a child or getting divorced, you will need to change your W-4 form.
How Many Allowances to Claim
The W-4 form has a worksheet to help you determine how many allowances to claim. As you fill out the sheet, you will need to think about the number of dependents you are supporting, your filing status, eligibility for certain tax credits and how many different jobs you and your spouse have at the same time. Each allowance you claim means less tax is taken out of your check. The IRS states that you may not claim more allowances than you are entitled to. While your W-4 form is held by your employer, the IRS can review it whenever it wants to.
Under Versus Over Withheld
While it is tempting to give yourself a "payroll loan" by claiming more allowances than you are entitled to, this could mean a large tax bill for you next April. In this situation, you are "under withheld." Similarly, if you do not claim enough allowances, the IRS may owe you next April because you were "over withheld." While it is nice to get a tax refund, you have essentially loaned the government money interest free. The goal of deciding how many allowances to claim is to not owe taxes nor to get a refund.
Reasons to Increase Allowances
There are several legitimate reasons to increase the number of allowances you take other than marriage and the birth of children. Perhaps you bought a more expensive home causing your mortgage interest expense and property tax payments to be higher than previous write-offs. Or, if you got divorced and are now paying alimony, this is a tax-deductible expense you did not have before.
Changing Your W-4 Form
Your employer will have paper W-4 forms for you to use to change your allowances. The form comes with a brief explanation and a worksheet to calculate allowances. But there are online programs available that also take into account other personal tax considerations not on the paper form. Your employer may also have an online program available through your human resources department.
References
Writer Bio
Lisa Nielsen is a marketing consultant for small businesses and start-ups. As part of her consultancy, she writes advertising copy, newsletters, speeches, website content and marketing collateral for small and medium-sized businesses. She has been writing for more than 20 years. She is also a business strategist, trainer and executive coach. Nielsen holds a Master of Business Administration from the University of Miami.