It's tax time again and one thing that came to my attention this year is the number allowance that I claim on my W-4 form with my employer.

Form W-4 is completed so that your employer can withhold the correct federal income tax from your pay. You should consider evaluating your W-4 allowances each year as you financial situation changes. To complete the W-4 Form, you specify marital status, and the number of exemptions or allowances you wish to claim. As the number of exemptions you claim increases, the amount of tax withheld decreases, and vice versa. You also have the option of specifying additional flat dollar amounts to be withheld.

IRS Form W-4Image via Wikipedia

Here are the boxes on the form:

Box 1: Name
Box2: SSN
Box3: Marital Status
Box4: Checkbox for name differences
Box5: Number of Allowance
Box6: Additional Amount $, per paycheck
Box 7: Exemption Status
Box8: Employer's Name
Box9: Office Code
Box10: EIN

If you tax return for 2008 is greater than $500, I would suggest evaluating and possibly increasing the number of allowance you claim on your W-4. This can be change any time. Each employer will have a different way of making the changes though so check with your payroll or human resources department. My employer gives us online access to submit changes to our W-4 forms and it will take effect on the next pay period which is nice.

For tax year 2007 our tax refund was more than $5,000 so I increased my allowances from 1 to 2. This was not nearly enough. This year (tax year 2008) our refund is more than $2,500. My employer provided some tables and a worksheet in order to make better decisions on the number of allowances you should claim. I also used a calculator from the IRS to evaluate my allowances. Using both came out with the same results. They indicated that I should be claiming 6 allowances and would still get an estimated return around $500.

So I dug a little farther and using details provided by my employer I was able to look at all my options. What I determined was that each additional allowance would knock $21 off the amount of taxes I was paying each pay period. So then divide $2,500 by 26 pay periods, is $96, then divided by $21 gives me 4.5 additional allowances I could claim to reduce the amount of taxes taken from my pay and therefore reduce the amount of money I was giving the government as an interest free loan. 4.5 plus the original 2 allowances equals 6.5, but since it has to be a whole number, I will settle on 6 allowances.

This will increase my wages by $84 per pay period or $168 per month!

Talk about a raise! My employer said "no pay raises this year", well I'll just give myself a raise.

I'd rather get $168 more per month than one lump sum in March or April. I've learned that I can do more with my money than the government can anyway. All they would do is SPEND it on something I don't agree with. I need to build up my emergency fund, add to my kids college fund, increase my retirement, pay off my house early…I can think of far better ways to use my money than loan it to the government interest free!

To evaluate your allowances and give yourself a raise, use the IRS Withholding Calculator.

Other resources you may find helpful are:
IRS Form W-4 Worksheet (pdf)
IRS Publication 919 How Do I Adjust My Tax Withholding? (pdf)

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