Payroll Tax Exemptions ($10 Question)
When it comes to how much money the government keeps out of your paycheck, there are often a lot of questions. You don’t want to be giving the government a free loan of your hard earned money, but at the same time, you don’t want to owe a lot of taxes when April 15 rolls around. This is a question from a reader regarding payroll tax exemptions:
Hi - this is a basic question but something I don’t fully understand, and couldn’t find an answer to on your site. We would like to increase my per-paycheck take home pay and want to better understand how many exemptions we can take on our W-2? I am married and we have two dependents, for a total family size of 4. Can you please advise on what we are allowed to take, and of course any other considerations you think would be crucial to understand? We are homeowners who are able to itemize our taxes to include our mortgage interest and tax payments. Thanks for your help, and keep up the great work. - M. T.
If you have an opinion you’d like to share to help this reader out, it could be worth $10 as this is part of our $10 comment series and would be greatly appreciated by all those curious about the same topic.
You can certainly take the number of exemptions you’re going to take on your tax return, e.g. if you are single with two kids, you can claim 3 exemptions for tax withholding.
When I was young and had two jobs, I took 2 exemptions for withholding. Because a second job pushed many workers into a higher tax bracket, they were allowed the extra withholding exemption to avoid being overwithheld.
Since your W-4 form stays with your employer, the IRS (usually) doesn’t much care how many withholding exemptions you use.
BUT you do have to be careful. There is a lot of fraud involving Earned Income Tax Credit (workers falsely claim nonexistent kids to reduce their withholding and to get the tax credit), so the IRS does look closer at these workers. Also, you have to have paid in least 100 percent of the tax you paid last year, OR 90 percent of the tax you owe for this year (on your (next) April 15 tax return), or else you will also owe a tax penalty for not paying enough during the year.