Federal Allowances

Federal allowances affect how much money will be withheld from pay. The more allowances you claim, the less income tax taken out of your paycheck. However, if you claim zero allowances, this means that you will have a much higher amount of income tax taken out of your paycheck. You’ll want to consider several factors, including how much you earn, if you have a spouse that also earns money, if you have dependents (children) living in the household, and whether or not you earn money from other resources, including gambling, commissions, and bonuses.

Tax Withholding

When you get paid, a certain amount of money is automatically withdrawn from your pay and provided to the Internal Revenue Services (IRS). Such withholding tax can also be collected from those with earnings from gambling, bonuses, and commissions. Such tax withholdings are identified on W4 forms, which is a form you fill out when you begin a new job. Again, keep in mind that winning earned from gambling, bonuses, and commissions, are also taxed. Therefore, while this information is generally not on Form W4 when starting a new job, the money earned must be identified as additional income come tax season.

Exemptions

There are some individuals who are eligible for filing exempt come tax season. However, there are only a few instances in which a taxpayer can file exempt, which include:

  • You may be eligible for an exemption if you owed no taxed in the previous tax year and received a refund for federal income tax that was withheld.
  • You can claim exemption if you have no tax liability for the current year.
  • Students may not always be exempt, especially if they have jobs. However, if the position is seasonal, i.e. during summer or winter break, they may be able to claim exempt if the position was part-time. Further, even if the student worked part-time throughout the entire school year, they may be able to claim exemption. If parents of the student can claim their child as a dependent, then the student may be able to indicate zero allowances on their tax forms if they remain a dependent under their parents.
  • If you are not a dependent but are a working student, you can claim two allowances as a single taxpayer would.

Allowances

  • You’ll want to claim ‘one’ if you want to receive a refund come tax season. You’ll likely receive a refund if filing alone as a single and have only one job.
  • For married couples, you’ll want to determine allowances based on how many children you have, if any, as well as if both of you earn money. If you have no children and both have jobs, you and your spouse should claim ‘one.’ You can claim ‘two’ but run the risk of having too little income tax withheld meaning that you may potentially owe tax come tax season.
  • If you are married, you can file jointly using one single tax form and claiming ‘one.’
  • If only one spouse is working, you should claim ‘two’ depending on how much the one spouse makes. It’s best to look at the Jobs worksheet to determine how many allowances to claim. It may also be wise to speak to an accountant regarding how many allowances to claim.
  • If you have children, you have an opportunity to claim the Child Tax Credit, which will deduct a certain amount from taxable income.
  • If you are married with two children, you should claim ‘two’ and have your spouse do the same for a total of four allowances.

Deductions

If you plan on itemizing deductions, this will impact the number of allowances you can claim. More specifically, taxpayers can claim more allowances if you have more itemized deductions. For instance, if you made a charitable donation, you can deduct that amount from your taxes and also claim additional allowances since you will have less income to pay taxes on. In order to identify how many deductions and allowances you should claim, you’ll want to complete the deductions and adjustment worksheet on page 2 of the W4 form. If you have any questions, you could speak to an accountant who can help you determine which deductions and allowances you should take advantage of and claim.

Considerations

There are many considerations to keep in mind when determining how many federal allowances to claim. Such allowances can impact how much you owe come tax season. More importantly, you should focus on paying more than what is required. That way, you can receive a tax refund, which can go toward financial goals, emergency funds, or savings. Further, you can earn interest on a certain amount if you put the money toward a retirement account. Also, you should keep in mind that the W4 Form can be adjusted at any time; therefore, if new circumstances arise, you’ll want to make changes to the form to ensure that you are claiming the proper allowances. You won’t want to claim too many allowances and owe money come tax season. However, not claiming enough allowances means that you earn less that could have gone to eliminating debt and increasing savings.

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