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 should 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 2010, each allowance that you claim reduces your taxable income by $3,650. If you claim more allowances than you have a reasonable basis for, the IRS can penalize you. If you received a large refund, then you should consider reducing 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 Form W-4 at all, your employer must withhold tax from your wages at the highest rate as if you’re single with no allowances.
Visit our Web site at www.hrblock.com to use our Withholding tool before filing a new W-4 with your employer. The H&R Block tax software 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 1 job.
You are married, have only 1 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.
Other life changes which may cause you to reevaluate your Form W-4 allowances include the following:
Lifestyle changes. For example, changes such as marriage, divorce, birth or adoption of a child, 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.
Changes in Your adjustments to income. The amount of your IRA or student loan interest deduction, the amount of alimony that you pay, or any other increases or decreases adjustment to income.
Itemized deductions changes. The amount of itemized deductions that you can claim changes. For example, you have an increase or decrease deductible medical expenses, taxes, interest expense, charitable gifts, job expenses, or educational expenses related to your job.
Use the Form W-4 Worksheet in the H&R Block software to calculate the correct number of allowances to claim.
If your income for 2010 exceeds $950, another person 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 still be exempted from withholding. The main criteria are that you owed no federal tax last year and expect to owe none in the current year. For 2010, for example, a single person who is not a dependent can have as much as $9,350 in gross 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 may be asked to send the form to the IRS. If the IRS questions the number of exemptions you claim, you will be asked to justify your claim.
If both you and your spouse are employed, figure the number of allowances you are entitled to together, and then divide the total number of allowances between you and your spouse. Many married couples, especially those with higher salaries, under withhold rather than over withhold. The W-4 has a special worksheet for working (for example, two earners) couples. Based on the income of each spouse, this worksheet helps you figure the number of allowances that you should claim.
You should consider whether or not you have your employer withhold federal income tax from your company pension or annuity. You can also choose to have federal income taxes withheld from your pension, 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 may need to file a form with the payer to stop any required withholding. If you don’t complete withholding forms for pension benefits, taxes will be withheld as if you were married and claiming three exemptions. Therefore, taxes will only be withheld if your pension is at least $2,080 per month.
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, Voluntary withholding Request, to have taxes withheld from Social Security by choosing the rate - 7%, 10%, 15% or 25%. See IRS publication 505 for additional guidance.
If you receive a lump-sum payment from your retirement plan, the plan administrator is required to withhold 10% for federal income taxes. If you intend to roll the money over into an IRA or another tax-free pension plan the tax withholding requirement is 20%. 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 roll over the distribution 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 gross distribution that’s not rolled into 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 directly to another plan or IRA and provide 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 $20 or more per month in tips, you should report that income to your employer. Tip income that you report to your employer will be reported in box 7 (Social security tips) and box 1 (Wages) of your Form W-2. To learn more, see Tip Income.