I have no dependents, so I need to choose either 1 for myself, or 0. In the past I have always claimed 1, but around tax time I always hear people spouting off about being double taxed, bigger refund checks, basically a bunch of nonsense. So my question is, is there any financial benefit in claiming 0 dependents, or should I still claim 1?
Since W4 is too short for a search, I don’t know if this has been previously answered . If so, a link would be greatly appreciated.
If you claim zero, you have more tax taken out. If you claim one, you have less tax taken out. If you claim zero, you generally get a bigger refund when you because when you file your tax return you have to put the true number of exemptions. Some people cannot trust themselves to bank away enough money so that they’ll have enough to pay should they owe any taxes at tax time, so they claim less exemptions than they are entitled to, thereby giving the government a free loan for a year.
I believe that a single person with no children can actually claim two. You get one automatically and you can claim another one for yourself.
Well actually, you can claim 10 if you want on your W-4 no matter if you have zero children or 10. All it means is that your withholding will be based on your claim of 10. When you file your actual return you have to prove you were entitled to claim 10. If you can’t, then you’re going to owe a whole bunch of taxes, since very little was taken out all year when it should have been.
In addition, the amount withheld has to equal a high percentage of your tax bill (90%, IIRC). So if you owe a lot of money due to faulty W2 withholding, the IRS can sock you with fees.
It makes more financial sense to owe taxes that to get some money back. So adjust your withholdings so that you have to pay a little bit come April 15th. But don’t over do it… as RealityChuck says, if you end up owing too much money, the IRS will get upset.
Why is that?
Because if you get money back when you file your taxes, it’s because you had too much money withheld throughout the year, and you have therefore given the government an interest-free loan.
Yes but in this, you are assuming you’re dealing with someone who is financially responsible.
The standard claim of “not giving the govt any free loan” is easily combatted by the tales of people claiming to get the most money back and then not having $2000 to pay the government back in April.
True, if you are the type who ferrets away the money to pay the back taxes, your better bet is to keep the money in the first place.
However people who tend to just blow the extra cash on other things can be in a world of hurt when it’s time to pay the piper so to speak.
if you have to pay two grand you may have calculated incorrectly.
We figured out our potential liability, adjusted our forms accordingly, and had to pay out $800 (we mis-figured daycare expenses).
You can also have them take out a specific amount of money if you don’t want to claim 2 but dont want to have to pay out a huge amount, IIRC.
You can always do a rough of your taxes at the beginning of the year and figure out how much you would owe and then make your exemptions accordingly. It’s not that difficult unless, perhaps, you start and stop several low-paying jobs throughout the year.
If you put a little effort into it, you should be able to estimate your tax liability pretty close to what it really is. Anyone who is “surprised” by having to pay some giant chunk of money on April 15 didn’t plan things very well.
The best scenario, is to end up owing $0 or as close as possible by the end of the tax year. Of course, this is quite tricky if you are married (and/or have kids), have more than one job, or other income, dividends, etc. that will make it very difficult to get near $0 liability.
Your employer’s payroll department has the 2004 “Circular E, Employer’s Tax Guide” aka IRS Publication 15…ask to see it and look (in the tables) what your deductions will be if you claimed Single, 1 dependent v. Single, 0 dependents for your comparisons. Or, you can look it up here. This is a pdf file.
Also, rather than claiming a certain number on your W-4, you can request an exact amount to be taken out of your check each payday, therefore taking out an expected amount out of each check, each pay period.
Example: If your total tax liability (not just what you owed [or even refunded], but your overall taxes owed for the year) last year was $2400, and you are paid twice monthly, and expect little or no increase in salary, then on your W-4, claim the max # of dependents and on line 6, “Additional amount, if any, you want withheld from each paycheck”, enter $100 (which is $2400/24 pay periods). You should see $100 dollars deducted from each check. If you are starting now to have more fed tax taken out (let’s say there’s only been $100 taken out so far), then since there are 17 paydays left in the tax year, then divide ($2400 - $100)/17 paydays left ~$135 each for the remaining pay periods.
This is a simple calculation for a single person with no other dependents, more calculations are needed for children, spouses, 2nd jobs/incomes/dividends, etc.
Well, it depends. The last couple of years I’ve had large, unexpected, financial changes in December, which made all of my planning up till then useless. Some times it was a large deductible expense in December, lowering my taxable income. Other years it was large capital gain distributions, increasing my taxable income. I’ve tried to plan, but something always changes at the last minute.
Ed