How Many Allowances Should I Claim

October 1, 2019 by  
Filed under Bankruptcy, Finance

How many allowances should I claim? That is the question many people ask when filling out their W4. Taxes are ever-changing, and rarely understandable for many people. Unless you work in the accounting industry, it's easy to see taxes as a tedious situation you pay little attention to. It's not uncommon to know only the basics regarding taxes (i.e. you pay them) and nothing more without an accounting degree or a job in the tax industry. While many people feel that taxes are boring, there's still a need for them. Without taxes, the nation wouldn't operate in a functioning manner. However, that doesn't mean you don't have questions.

When your employer hires you to work, you're given a W4 form to fill out. This form is a tax form that's short and sweet. Very little information is required to complete this form, but it's necessary you claim the correct number of allowances or risk miscalculating your income taxes at the end of the tax year. How many allowances should I claim? That depends on what you make, where you live, and how many people are in your family. There are other factors, too, and that's why you should understand what it means to choose allowances before you complete your form W4.

The Basics of Tax With holdings

How many allowances should I claim is not an uncommon question, but the other most common question people ask in conjunction with that one is why is my money being withheld from my paycheck? It's not unreasonable to ask this question. It's your money. You earned it when you worked, and you should know where it's going, and why your employer is taking it from you.

What Is Withholding Tax?

Withholding tax is money your employer takes from your paycheck to send to the appropriate tax entity within the Internal Revenue Service. Everyone who earns a living of a certain amount every year is required to pay income taxes to the government. It's how the government works fiscally. Your money is calculated and sent to the IRS by your employer to pay your taxes.

You then file an income tax return at the beginning of the following year for the prior year. On your income tax form, you disclose how many people live with you, how much you care for them, what you earned, and what kind of tax deductions and credits you have throughout the year. This tells the IRS how much you owe them, and they either send you a refund because you paid in too much in withholding tax or you send them a check because you did not pay enough in withholding tax throughout the year.

Tax Withholding Exceptions

If you are self-employed or you are a contract or freelance employee who receives form 1099 rather than a W2 from your employer, you do not have an employer. Your payroll taxes are paid by you when you file your income taxes. Depending on your filing status and your personal situation, you might consider paying income tax payments quarterly to avoid being hit with a large tax bill at the end of the year.

What Is an Allowance?

How many allowances should I claim? If you're here to figure out what you need to do when you're filling out your W4 form, you are not alone. What is an allowance? If you're asking how many allowances should I claim, you're probably also wondering what, specifically, is an allowance?

An allowance is a person. You get to claim one allowance per person in your household. For example, you are one allowance. Your spouse is another allowance. Any children or other dependents you have are each an allowance.

However, when asking how many allowances should I claim, do not automatically claim all the allowances in your home. This is where things get a little confusing. The more you claim, the less money you have withheld from your income taxes. The fewer allowances you claim, the more money you have withheld from your income taxes.

Factors To Consider

When deciding how many allowances should I claim, you must consider how much money you want to have withheld, whether you want a big refund, whether your spouse also has a job and has claimed allowances on his or her W4, and what you want to bring home each paycheck. Do you want to bring home more money each paycheck and have that income in your pocket, or would you rather pay it to the IRS and give them an interest-free loan for a year? Understanding how many allowances to claim is complicated because of the numerous options you have.

How Many Allowances Should I Claim?

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Image by Steve Buissinne from Pixabay

How many allowances should I claim? You're probably wondering this even though you have all this new information. It's confusing, and it's not always easy to figure out what to do and how to make the correct financial decision.

You're Not Required to Claim a Specific Number

Let's say you have a family of six. You, your spouse, and the four kids you and your spouse have together. You have a family of six, but that doesn't mean you're required to choose six allowances. If you do choose six allowances, you will have less withholding taken from your paycheck. This is because having that many allowances typically means you have more exemptions and tax breaks on your income taxes. This lowers the amount of your tax liability significantly, which means you owe the IRS less money.

 

If you choose to check the box for zero deductions, you will have the most money taken from your income taxes. This is helpful if you worry about being hit with a tax bill at the end of the tax year. It's hard to file your income taxes only to realize you owe money that you may or may not be able to afford. If you cannot afford to pay your tax bill at tax time, the IRS begins charging interest right away, and it's not cheap.

How Much You Bring Home

How many allowances should I claim? That depends on how much of your earned income you want to take home. Your paycheck is affected either way. If you choose to claim as many allowances as possible, you will bring home money in each paycheck. If you choose fewer allowances, you will have more money taken from your check each pay period.

Does Your Spouse Work?

Stack of coins and different colors of ball pen  at the top of a paper

Image by Steve Buissinne from Pixabay

If your spouse works and he or she also claims an allowance on his or her W4, that's another factor to consider. How many tax allowances you claim might depend on whether your spouse is allowing you to have the most money withheld or whether you are allowing your spouse to share that duty with you. You must sit down together and decide which way works best for you financially.

What's Your Previous Tax Situation?

Finally, you need to consider your tax situation of the past. Do you typically get a big refund from the IRS or do you pay? If you're paying the IRS, you may consider lowering the number of allowances you claim, so you have more money taken out of each check. Now, you won't have to write a check to the IRS at tax time. If you get a big refund from the IRS every year, you're giving them an interest-free loan on you, but they are earning money from your money.

If you get a large refund, you are paying too much money that you should bring home in each paycheck. If you like receiving a large refund, that's your prerogative. However, you may consider increasing the number of allowances you claim, so you have fewer taxes taken out of each check. That money is better utilized every time you get paid than it is to sit in the IRS' bank account all year.

How to Figure Out Your Tax Withholding

If you're still confused, you might want to know the IRS offers taxpayers a useful tool designed to help you figure out how much income tax to withhold from each check. It's called the IRS Withholding Calculator, and it's easily found online.

This calculator asks you a series of questions designed to help you figure out how many allowances to claim.

  1. 1
    What's your filing status?
  2. 2
    Are you a dependent on someone else's return?
  3. 3
    How many jobs do you have?
  4. 4
    How many jobs does your spouse have?
  5. 5
    How many dependents do you have?
  6. 6
    Do you get a child or dependent care credit?
  7. 7
    How many kids get the child tax credit?
  8. 8
    How many kids qualify for the earned income credit?
  9. 9
    Do you get any other tax credit?
  10. 10
    Your income information
  11. 11
    Other personal information

Using the information you provide, the calculator will provide you with a suggestion as to how many allowances you should claim.

Conclusion

Taxes are confusing, and that's why so many people ask how many allowances should I claim? Ultimately, the number of allowances you claim is up to you, but these tools can help you make the best financial decision for your family. Every family and every financial situation differs, so take the time to consider your personal situation rather than taking advice from friends or family who have a different familial and income situation.

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