IRS W-4 calculator recommended allowances
Submitted by finance-editor on Sat, 05/10/2008 - 09:00
in
I started my very first salary job on June 4th 2007, and I'm totally confused about my W-4 and just how much tax is withheld and now many allowences I should take. I don't want a huge refund check next April. I simply want to maximize my monthly income.
When I use the IRS W-4 calculator, it actually recommends that I take 7 allowences on my W-4 so that I don't overpay taxes next April. Here's the run down...
Filing Status: Single
Someone else can claim you as a dependent: No
Number of jobs: 1
Number of dependents: 0
Will you be 65 or older 1/1/2008: No
Are you blind: No
Child & dependent care credit qualifying persons: 0
Child & dependent care credit expenses: 0
Eligible children for child tax credit: 0
Other credits: 0
Total salary for 2007: 48,681 ($7,000 per month, paid
bimonthly except June)
Total retirement plans: 0
Tax withheld to date: 1,663 (for the full month of June)
Projected withholding for rest of year: 9,141
Total earned income other than salary: 0
Other nonwage income: 0
Adjustments to income: 0
Total itemized deductions: 0
The IRS calculator says that I'll actually overpay my Fedral Income Tax by $4,399, and it recommends that I take 7 allowences for the remainder of the year to offset the balance. According to this recommendation, that will leave me with a refund check of around $200 next spring... which would be just fine by me.
I'm not worried about the legal or financial questions here. What I want to know is... Is this recommendation accurate? Assuming that I've calculated my earnings correctly, will 7 allowences actually give me my maximum paycheck without underpaying my income tax each pay period?
I'm asking because everyone I've talked to (not tax professionals, just friends and family) says that I should take 1 or 2 allowences max. But, according to the IRS, that would give me a very large refund check next spring. I would MUCH rather have the extra $600+ at the end of each month than the extra $4000+ each spring. $600 per month covers my car, which, at this point in my life, is a substantial investment.
I hope someone out there can answer this. Thanks!
Btw, here's the link to the calculator...
http://www.irs.gov/app/cgi-bin/wh07.cgi/p5/en
Its probably correct
The 7 is probably correct. This is a known anomaly that results from you starting your job mid-year. At the start of next year you'll need to drop back to 1 or 2.
The deal is that the tables which tell your employer how much to withhold given the number of exemptions assume you're working a full year. But for this year, you didn't. So if you claim the typical 1-2 exemptions, you'll be massively overwithheld.
But again, you will need to switch to 1-2 at the start of next year. For a full year 7 will leave you massively underwithheld.
IRS Withholding
I thought so too, but not exactly: 1-2 will be the correct withholding. 7 will leave him underwithheld, but with no penalty (because he'll have paid more withholding than his total tax bill for this year). So if he's disciplined
enough to stick the extra money in the bank, he's better off not amending his W-4 until the following year.