Form W-4 is the form that you file with your employer to show whether you’re married or single and specify how many withholding allowances you want to claim. The more allowances that you claim, the less tax is withheld. Because your circumstances may change from year to year, you should review your withholding allowances each year.
In 2007, each allowance that you claim reduces your taxable income by $3,400. If you claim more allowances than you deserve, the IRS can fine you. If you received a large refund, then you should reduce the number of allowances that you claim so less tax is withheld. If you wrote a large check to the IRS, then you should increase the number of allowances that you claim. If you don’t file a Form W-4 at all, your employer must withhold tax from your wages as if you’re single with no allowances.
Visit our Web site at www.hrblock.com to use our Withholding Calculator before filing a new W-4 with your employer. TaxCut includes a Form W-4 Worksheet to help you figure out the number of allowances that you should claim.
In addition to the allowances that you claim for yourself and your dependents, you should add extra allowances if:
You are single and have only one job.
You are married, have only one job, and your spouse doesn’t work.
Your wages from a second job or your spouse’s wages are $1,000 or less.
You have at least $1,500 of child- or dependent-care expenses and will claim a tax credit for these costs.
You will file your return as a head of household.
You will claim child credits (which are worth $1,000 for each eligible child). The number of allowances that you claim depends upon the number of eligible children and your income.
If your 2007 adjusted gross income exceeds $156,500 ($78,200 for those who are married filing separately), you are restricted in the amount of itemized deductions that you can claim. Make sure that you take this into account when figuring your withholding allowances.
If you expect your deductions to be the same as last year, use the same allowances on this year’s W-4. If you experience a change, such as:
Lifestyle changes. For example, changes such as marriage, divorce, the birth or adoption of a child, the purchase of a new home, or retirement.
Job changes. You or your spouse start or stop working, or start or stop a second job.
Income changes. Your income from sources that aren’t subject to withholding increases or decreases. This includes income from interest, dividends, capital gains, self-employment, and IRAs.
Adjustments to income changes. The amount of your IRA or student loan interest deduction, the amount of alimony that you pay, or any other adjustment to income increases or decreases.
Itemized deductions changes. The amount of itemized deductions that you can claim changes. For example, you have an increase or decrease in medical expenses, taxes, interest expense, charitable gifts, job expenses, educational expenses, or the child tax credit.
Use the Form W-4 Worksheet in TaxCut to calculate the correct number of allowances to claim.
If your income for 2007 exceeds $850, your parents can claim you as a dependent on their return, and if you have more than $300 of unearned income, such as interest on a savings account or mutual fund dividends, you can’t be exempted from withholding.
If you can’t be claimed as a dependent, you can make much more and be exempted from withholding. The main point is that you owed no federal tax last year and expect to owe none in the current year. For 2007, for example, a single person who is not a dependent can have as much as $8,750 in taxable income before any tax is due.
If you earn $200 a week or more and claim the exemption from withholding on your W-4, your employer has to send the form to the IRS. As with taxpayers who claim more than ten allowances, the IRS may ask you to justify your claim.
If both you and your spouse have jobs, you figure the number of allowances you are entitled to together, and then divide the allowances between you. Many married couples, especially those with higher salaries, under withhold rather than over withhold. The W-4 has a special worksheet for working couples. Based on the income of each spouse, this worksheet helps you figure the number of allowances that you should claim.
It’s entirely up to you whether or not you have your employer withhold federal taxes from your company pension or annuity, from traditional IRA withdrawals, or from your Social Security benefits. You have to ask for taxes to be withheld from Social Security. With other retirement plans, you must file a form with the payer to stop any withholding.
You should re-evaluate each year to see if you want to have taxes withheld. Use Form W-4P to have taxes withheld from your pension, annuities, and IRAs. Use Form W-4V to have taxes withheld from Social Security by choosing the rate—7%, 10%, 15% or 25%.
If you receive a lump-sum payment from your retirement plan, the plan administrator is required to withhold 20% in taxes. This occurs even if you intend to roll the money over into an IRA or another pension plan within the allowed 60 days. This applies even if you retire, quit, or are laid off. This is a forced prepayment of a tax bill that you may or may not owe. If you do roll over the payment yourself, no tax would be owed.
Although you can handle the rollover yourself by taking the check and depositing it in a rollover IRA within 60 days, the withholding rule might make that cumbersome to do. If you choose to receive a check and do the rollover yourself, 20% of your distribution will be withheld. Unless you include the amount equal to the 20% withholding from another source, you won’t have enough to put the full payment into an IRA. Any part of the payment that’s not in an IRA within 60 days will be taxed and possibly penalized.
To avoid having 20% withheld from your distribution, tell your employer that you want to roll the funds over and give them the information to effect the rollover. They will do the transfer and the event will be tax-free to you.
Any tips that you receive are considered taxable income and are subject to withholding. If you receive more than $20 per month in tips, you should report that income to your employer. Tip income that you tell your employer about will be reported in box 7 (Social security tips) of your W-2 form. To learn more, see Tip Income.