W-4 question?

[aracko]

What is the difference between an Allowance and a dependant?

 

I was told I pay too much on my taxes for having 3 kids - and I am giving the government a short term loan. Whatever - I dont care about that but what I do want to know is my employer gives me an opportunity to change my "allowances" so I wanted to see if that is the same as changing my "dependants" so I pay less in taxes.

 

Thanks!

[TheBwaz]

That is pretty much the same thing. You are allowed to take one "allowance" for yourself and each dependant. If you have 3 kids, you can take up to 4. Unless you like writing a check every April, I usally say go one less than what you can.

[Blancofan1]

Allowance on a W4 and dependents on your actual 1040s are the same thing. Basically when filling out your W4, the more allowances you claim, the less taxes they take out of your check every week-but the less you get back in April-or the chance of having to pay in. If you filed this year and are getting a decent refund back, you should be able to claim one less allowance on your W4 and be fine.

[whizkid]

Have you looked at the W-4? It's pretty self explanatory if you go through it line by line. For each allowance, X number of dollars less will be withheld from your paycheck. Allowances have nothing to do with how much tax you pay, only how much is withheld to cover your taxes. But they should match closely with how much tax you will owe. According to the W-4 you can take one allowance for each dependent but depending on your income, you can take 1 or 2 additional allowances for each child due to the child tax credit if your kids are eligible for it. You can also take 1 for yourself and an additional 1 or 2 if your wife doesn't work.

On the other hand, if you have interest or dividend income or other income where taxes aren't being withheld, you need to reduce your allowances to allow for the tax due on this income.

I wouldn't make a big change all at once, maybe 2 to start. It depends on how many allowances you are claiming now and how big your refund was. Estimate how much tax you will owe next April and make your allowance change. Then estimate how much will have been withheld by the end of the year at the new allowance level. That would include your wife's withholding if she does work. If it's still more than you will owe, increase your allowances a little more.

In the end it comes down to having enough withheld to cover your taxes but not too much. The magic W-4 formulas don't always work so you have to do some estimating on your own for your situation.

[dadofandrew]

It may not make much sense, but if you have trouble saving money, you may want to leave it the same. I'd a lot rather have $1000 than $20 a week, even if it makes little sense.

[aracko]

Thanks guys. I took it from 0 to 1. Maybe I will readjust next year. My tax return was really quite large - I am definatly overpaying.

[whizkid]

0 to 1 with 3 kids that may be eligible for the child tax credit? Here's a withholding calculator that is more detailed but may be more straight forward to follow. You can adjust more than once a year.