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How Do I Calculate the Number of Exemptions I Should Claim So That I Don’t Have to Pay Taxes at the End of the Year?

 If you always find yourself in a maddening scramble to come up with the money to pay your taxes in the spring, it's a good idea to make sure that enough tax is taken out throughout the year. Having enough tax withheld is kind of like spreading your Christmas purchases throughout the year, instead of driving yourself crazy trying to buy everything on Christmas Eve. MAKING BREAD asked two experts what you can do to keep your sanity next spring.     

            “This question is difficult to answer without knowing more specifics about the situation of the person involved, “ responds Michael Myron, CPA, based in Bethlehem, Pennsylvania.  “However, I can offer this simple rule of thumb: as the number of exemptions claimed increases, the amount of tax withheld from one’s pay decreases; so if you’re looking to avoid paying tax at year-end you will want to claim fewer exemptions (possibly zero), which will result in more tax being withheld. To estimate the amount of exemptions to claim, taxpayers can use the worksheet provided on page two of Form W-4. Form W-4 can be accessed on the official IRS website at www.irs.gov. Many estimates must be made in order to complete the worksheet,” continues Myron.

            Even by claiming zero exemptions, you might still end up owing money, however. Another way to cover your bases, according to MAKING BREAD’s resident financial expert, Reginald Owens, Ph. D., is to  “estimate your expected income and tax owed, then divide that figure by 12 and submit a W-4 form, requesting the resulting figure be withheld, to your payroll department. They’ll take care of the rest.”

             You’ll also find a withholding calculator at www.irs.gov, which can be used to figure this amount. ”The purpose of this application is to help employees to ensure that they do not have too much or too little income tax withheld from their pay. It is not a replacement for Form W-4, but most people will find it more accurate and easier to use than the worksheets that accompany Form W-4,” says the IRS. “You may use the results of this program to help you complete a new Form W-4, which you will submit to your employer.”

            Who benefits most from this calculator? Individuals who are holding down than one job, or couples in which both partners are employed, as well as taxpayers who are entitled to file as Head of Household and those with several children eligible for the Child Tax Credit. These people’s taxes tend to be more likely to be only approximated by the worksheets on the paper W-4. Others who might consider using the calculator are employees with non-wage income (dividends or interest) that exceeds their adjustments and deductions, who would prefer to have tax on that income withheld from their paychecks rather than having to making separate payments to the IRS throughout the year, in accordance with the estimated tax procedures.

            Be prepared to do some “taxing” work when you sit down to fill out the form supplied by the calculator. The IRS recommends that you have “your most recent pay stubs and your most recent income tax return handy; fill in all information that applies to your situation; estimate values if necessary, remembering that the results can only be as accurate as the input you provide; and consult the information links embedded in the program whenever you have a question.” In other words, you will have questions. Your privacy is guaranteed when you use the calculator. The information can’t be used to identify you, and it is discarded when you exit the program, according to the IRS.

            One final suggestion: if your tax situation is complicated by special circumstances, such as an unusual loss or increase of income or change of marital status, it’s wise to consult a financial adviser or accountant who knows the latest tax laws. Virtually every financial move you make (selling a stock, inheriting money, buying or refinancing a house, claiming Social Security, divorcing) can have significant tax implications; it’s best to know beforehand what those implications are so that you can protect your assets.

            For more information about filing your taxes, read “How Low Can I Owe? If You Dread Tax Time, Here’s How You Can Ease—and Even Postpone—the Pain,” in the “$aving & $pending” department of our site.

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Michael Myron, CPA, who responded to this question, works with BucknoLisicki & Co. CPA and Business Consultants in Bethlehem, Pennsylvania. He can be contacted at  mm@blco-cpa.com for further information.

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