How do I choose the number of exemptions on my W-4?

March 3, 2009 10:44 AM

What is the best strategy for choosing the number of exemptions when filling out a W-4? Currently I'm getting a pretty big return come tax time. Should I be declaring more exemptions so that my return is closer to 0? That way I will have more money throughout the year to invest.
posted by zzztimbo to work & money (11 comments total)

Well, the financially ideal strategy is to have them take as little as possible out. Then you can earn interest on that money all year long. In practice, this is kind of a pain in the ass, because if you calculate wrong, you can end up owing more than you thought at the end of the year. If you don't have a big enough cushion to cover that, it can put you into financial trouble.
posted by chrisamiller at 10:51 AM on March 3

I always declare the fewest number of exemptions, have them withhold at the higher single rate, and take extra taxes out of every paycheck.

I like getting a big fat return in late March, early April.
posted by Irontom at 10:54 AM on March 3

this will help you determine the right number.
posted by wocka wocka wocka at 10:56 AM on March 3

A strategy I've been using successfully for years is to claim 99 deductions (paying no taxes as calculated through the deductions->withholding formulae) and then put in an amount for "extra withholding per pay period" that's equal to 1/12 (or 1/26 or whatever) of my last-year's taxes. That way, I withhold exactly the same this year as I paid last year, which protects me from underpayment penalties (IIUC).

If I expect to make more in the current year, I either withhold more, or at least set it aside so it's not a problem next April 15th.

IANACFP.
posted by spacewrench at 10:57 AM on March 3 [1 favorite]

Most single persons not claimed as depedents should claim one (for themselves) if your in school or have other things like a mortgage that your interest can be deducted from you can up your claim... going to college also has a deduction.

Are you the type that can save the extra money each month in an interest bearing account or will you simply spend the cash? The answer to that question will dictate if you should up your deductions or keep them where they are now...
posted by crewshell at 10:58 AM on March 3

No no no. Contrary to what everyone else is saying, you want to take AS MANY exemptions as possible. It does not change the amount you owe in taxes. If you have to pay, say $5000 in taxes, you still have to pay $5000 when tax time rolls around.

Now, if you only paid $4000 of that from your paycheck and now owe $1000, the government just gave you an interest free $1000 loan for a year. If you instead paid $6000, you were the one giving the interest free loan.

I for one, would prefer to have the interest free loan which I can stick in a savings account or a CD or something until tax time rolls around.
posted by phrakture at 11:19 AM on March 3

Phrakture, that will result in penalties if you own the government enough money for failing to have enough withheld.

wocka wocka wocka has it right.
posted by iknowizbirfmark at 11:23 AM on March 3

Take a look at the calculator on the IRS website.

Also see the calculators on this fabulous site.

These've been very helpful to me.
posted by jgirl at 11:32 AM on March 3

Given that interest rates on savings accounts are incredibly low (like less than 2-3%) and are likely to stay that way for some time, the benefit of holding on to more of your paycheck during the year will be smaller than in years past. That small amount of interest may not be worth it to deal with the risk of underpayment next tax season. FWIW, I always declare 0 exemptions and then get a nice fat refund each March. I know this is suboptimal, but this makes it easier to save a large chunk of money each year.
posted by thewittyname at 12:17 PM on March 3

Of course, with the economy being like it is right now, it might be in your best interests to have your extra money every month, rather than getting stuck next year with NO tax refund when your state can't afford to pay it back to you. I'm not saying that this will be the case for federal refunds, but it's definitely something to consider.
posted by scarykarrey at 12:28 PM on March 3

To fill out the forms correctly you'll have to say "refund" when you want a refund and "return" when you're filing a return.
posted by JimN2TAW at 4:12 PM on March 3 [1 favorite]