To With-hold or Not to With-hold?

I have found, in my time as a tax preparer, that a large number of taxpayers don't recognize the term "W-4". When I ask, "What do you claim on your W-4?" Most people think that I am talking about their W-2 and reply, "I don't know? I just let the IRS figure it out".

The IRS form W-4 (Employee's With-holding Allowance Certificate) is used by employers, to inform the IRS how much to withhold from your pay. Once I explain that, they know exactly what I am talking about.

Unfortunately however, most taxpayers don't know what they are claiming. If you are single without dependents, and you want a larger refund, you should absolutely, positively and most definitely claim zero. (A large number of taxpayers don't even realize they can claim zero) And if it's within your budget, there is a little Grey area near the bottom labeled, "Extra to be With-held".

In this box, you can indicate how much "extra" you would like the IRS to with-hold each pay period. This is like setting up an interest free savings account with the IRS that goes towards your taxes paid. And every bit of this amount that exceeds your taxes paid, comes back to you at the end of the year. It also helps to cover higher tax percentages that come with increased Income.

Generally, when you claim zero, the IRS takes 15% of your income each pay period. Claiming one is 10% and two is 5%. I'm pretty sure 5% is the lowest they take, so claiming three or higher doesn't affect the with-holding amount. In effect, if you need more money during the year, claim a higher number and if you don't necessarily need it, claim a lower number.

You have to go through your employer to examine or change your W-4 and if you just started your job last year, the IRS may have with-held too much or not enough. Your employer may be able to work with you as a part year employee to help with either over or under with-holding of taxes throughout the year. Over payment means you will get a bigger refund or maybe even lower your taxes due, so it might not be a bad idea to leave the W-4 as it is.

Always remember to claim with-holding for tips, sick pay, unemployment compensation and gabling winnings. Tax payers can be subject to under payment penalties for improper, "Other Income" with-holding.

How all this pertains to personal exemptions and dependents is that the W-4 is where you inform the IRS of those dependents and personal exemptions. It is how you indicate to the IRS how man children, family members or spouses (Depending on your religious beliefs) you may want to claim.

Always check to make sure you and your dependents qualify before you file. A test chart can be found in the IRS publication-17. There are three dependent qualification tests, Qualifying Child, Qualifying Relatives and Taxpayer Disqualification.

Qualifying Child:

1. The child must be your son, daughter, step-child, eligible foster child, brother, sister, half-sister, half-brother, step-sister, step-brother or a descendant of any of them.

2. The child must be a) under the age of 19, b) under the age 24 if full-full time student at the end of the year, c) any age if permanently and totally disabled.

3. The child must have lived with you for more than half the year.

4. The child must not have provided more than half of their own support.

5. If the child meets the rules to be a qualifying child for more than pone person. You mist be the person entitled to claim the child as a qualifying child.

Qualifying Relative:

1. The person cannot be your qualifying child or the or the qualifying child of someone else.

2. The person must either be related to you in one of the ways listed under Relatives who do not have to live with you (see IRS Pub-17) or lived with you all year as a member of your household (relationship must not violate local law).

3. The person's gross income must not exceed $3,300.

4. You must provide more than half of the person's total support all year.

Taxpayer Disqualifications:

1. You cannot claim any dependents if you or your spouse (if claiming jointly) can be claimed as a dependent.

2. You cannot claim a married person who files a joint return as a dependent, unless there is only a claim for the refund with no tax liability for either spouse on separate returns.

3. You cannot claim a person as a dependent unless that person is a U. S. citizen, U.S. resident, U.S. national or a resident of Canada or Mexico for any part of the year.

4. You cannot claim a person as a dependent unless that person is your Qualifying child or Qualifying relative.

The amount of support to have been provided is determined by how much the dependent's income was and how much they spent on themselves. You must have provide more than half of the dependents support, means that if Uncle Joe made $2,400, and gave you $400, you would have to have paid more than $1000 for supporting him.

There is a phaseout of exemptions in progress this year. Once your AGI goes over a certain limit, the amount you can claim as a deduction is reduced. The reduction level varies depending on your filing status. If you are filing Single and your AGI (Adjusted Gross Income) limit is 150,500. For MFS it's $112,875 and HOH is $188,150. MFJ and Qualifying Widow(er) are the same at $225,750.

The dollar amount of you exemptions is reduce by 2% for each $2,500 ($1,200 for MFS) over your AGI. And If your AGI exceeds the level for your filing status, you need to the Deductions Worksheet provided in your 1040 tax instructions.

There are other sub-requirements under each of the requirements listed above. For a more detailed explanation on exemptions, dependents, support requirements, tests and worksheets, refer to the IRS publication-17, found on the official IRS web site.

Remember to list all qualifying dependents social security numbers and double check to make sure they are correct and authorized to use. The number-one reason the IRS rejects a dependent is, "Wrong SSN". Once again, for all other tax questions, feel free to contact me via email, post a comment or go to irs.gov and type your question in the site's search engine. Thank you and have a nice day.