Filling out your Federal W-4 Form

If your employer hasn’t already, they should have given you a new W-4 form to update your Withholding exemptions. These should really be updated each year and adjusted according to what your tax liability was for the prior year. Now, being it’s only January, you most likely won’t have your W-2 or Tax Returns completed yet for last year but if your filing status has changed … ie you got married, had a child or other dependent, or possibly bought a house… you should go through the step by step calculation to see if you have your exemptions correct.

What is an exemption? A Withholding Exemption is a deduction from your gross income that reduces your period income by a given dollar amount when calculating your Federal and State income tax on that payroll amount. Example: If you are paid weekly, 1 exemption is equal to $43.30 (rate for 2016) so if you claimed 3 exemptions and were paid $500 per week, your TAXABLE income for Income tax purposes would be $370.10 ($500 less 3x$43.30 or $129.90). The exemption amount changes depending the frequency you are paid. The annual value of each exemption is $2,250 so if you are paid monthly, your exemption amount would be equal to $187.50 PER EXEMPTION (or $2,250 divided by 12).

How many exemptions should I claim? Don’t get carried away on claiming exemptions! The more exemptions you claim, the less is withheld in Federal and State income taxes on each paycheck. Although this may sound like a great idea, it could end up leaving you with a very large tax bill at the end of the year when you finally do your tax returns. Try to match your exemptions to what your liability actually is so that you come out with a Zero net tax, in other words No Tax Due but No Tax Refund either. This may be something you want to consult with your tax accountant on. I know a lot of people think that if they have more withheld that means a nice large check at the end of the year but I don’t agree with this savings plan. Set up a Savings account and put those funds in an account that you have access to in the event you have an emergency and need access to your money! Remember if you give it to the Government, you’ll need to wait to get it back. Wouldn’t you rather collect interest on that money and have it available if you need it?

The basic rule on exemptions is you get 1 exemption for each person who appears or will appear on your Income Tax Return. However, this basic amount is a TOTAL number of exemptions you can claim. So is you are married with a child, the total basic exemption you can claim on your W-4 is 3. You can split these in any way you’d like between you and your spouse.  If your spouse works too, you and your spouse need to split up the exemptions – if you take all 3, your spouse would need to claim 0. So long as you add up to 3 between the 2 of you, you and your spouse can claim any combination. In addition to the exemption for each person on the return, there are also exemptions you can claim for Child Care, Head of Household, and other Dependent Care expenses.

Should I be claiming Exempt from Withholding Taxes? Unless you are a FULL TIME STUDENT AND/OR your income is LESS than your Standard Deduction and Personal Exemption(s) on your Tax return, you can not claim exempt from withholding – period! This status is meant for tax payers who will have NO Tax Liability in the given tax year. If you claim this and your employer suspects that you do not fall into the category that allows you to claim exempt, they can consider your Form W-4 as invalid and request you complete a new form. However, if you refuse, they can send in your W-4 to the IRS for review. If the IRS reviews your W-4 and determines that you have falsely completed your form, the IRS will send you and your Employer an “INITIAL LOCK IN LETTER”. This letter will indicate that you have 10 days to correct your W-4. However, the IRS can also send you and you Employer a “LOCK IN LETTER” that permanently sets the amount of withholding exemptions you are allowed to claim. And normally, they will set your new withholding Exemptions at Single with 0 Exemptions – insuring the maximum amount of withholding. Under these letters, you can appeal but your employer can not change your withholding without a release from the IRS. Basically, the IRS is punishing you for not withholding federal income taxes based on information they have from your prior years Tax Return and your filed W-2. If you are not sure if you can claim exempt, ask your tax accountant or your Payroll Administrator at you place of work.