At the start of each year or when you start a new job, your employer will ask you to fill out a W-4 form. This is used by your company to determine how much money to withhold from your paycheck in federal income taxes. The IRS offers a chart on your W-4 form to help you determine how many exemptions you can take, but you are not required to follow that form. In the end, you can claim as many exemptions as you want, but it is important to understand how the system works.
The more exemptions you take on your W-4, the less money your company will deduct from your paycheck. The idea is to allow you to take home as much pay as possible each pay period without having to pay income tax at the end of the year. But it is not an exact science, and following the exemptions form on your W-4 could cause you to get a tax bill when the year is over.
Calculating Your Exemptions
The form on your W-4 is self-explanatory on how many exemptions you should take. For example, if you live along then you take one exemption, provided that no one else can claim you as a deduction on their tax forms. This applies mostly to children who can still be listed on their parent’s taxes as dependents. If this does not apply to you, then you would claim one exemption.
If you have a spouse but they do not work, then you would take another exemption. If you file your taxes jointly with your spouse but you file as head of household, then you can take another exemption. Once you have the initial exemptions figured out, then you would add in the number of dependents you have.
How The System Works
If you take 10 exemptions, then you will have very little money taken out of your check for federal income taxes. If you have 10 dependents, then you simply will not get a tax refund at the end of the year. But if you do not have 10 dependents, then you will have a tax bill to pay.
If you claim zero exemptions, then you will have no federal income taxes taken out of your paycheck and you would receive your maximum possible refund check. A good rule of thumb is if you want your money throughout the year, then claim your correct number of exemptions. If you want a big refund check, then do not claim any exemptions.
Claiming exemptions on your W-4 is far from an exact science. Many people prefer to claim zero to avoid having to worry about the possibility of paying a tax bill at the end of the year. Others do not want to use the IRS as a savings option and want as much of their money as possible for each paycheck.
If you use the exemptions worksheet on your W-4, then you stand a good chance at breaking even at the end of the year. But if you are not the kind to take chances, then enter as few exemptions as possible and get the difference back in a tax refund check the following year.