So, Selena...
I'm a single parent of three young children. I usually get back a nice tax refund at the end of the year, but going forward I would like to collect more money from my paychecks. Right now, I am only taking one exemption on my W-4. Will increasing my withholding allowances increase my take-home pay?
-Britt
Hi, Britt!
In short, yes, bumping up the withholding allowances on your W-4 will increase your take-home pay because the taxes being withheld from each check will decrease.
However, before you make any adjustments to your W-4, you should carefully asses your financial situation. Some things to think about include where the bulk of your refund is allocated and if you are willing to see less money come tax time. It's important to remember that a tax refund isn't "free" money. Most taxpayers only receive refunds if they have overpaid the IRS during the year. In addition, consider the advice of financial experts who recommend that we should not give the government an interest-free loan during the year, but instead try to end up as close to zero refund/zero balance due as possible. In other words, instead of overpaying on our taxes and waiting until the end of the year to be reimbursed, we should be putting our money into a savings account that accrues interest over time. But back to your original question...
It’s important to keep in mind that the total amount of allowances you can take on your W-4 typically depends on three factors:
- Filing status
- Dependents
- Number of employers
For example, you can claim one allowance for yourself and three additional allowances for your children, giving you a total of four allowances on your W-4 and increasing your take-home pay. If you have one job, you can claim all four allowances on one W-4. If you have multiple employers, you can divvy the allowances up per job.
While increasing allowances leaves you with more available funds throughout the year, this will have a rippling effect and your end of the year tax refund will decrease. Again, this isn't a bad thing! Especially if you're putting a small portion of those funds into a savings account each pay period. However, if you claim more allowances than you are allowed, you may end up owing the IRS, and the penalty for underpaying will cost you a pretty penny. Taking less allowances, though unpleasant, will ensure that you are “paying as you go”; and if you end of paying too much, the surplus will be credited to you via your tax refund.
Since life is ever-evolving, I strongly encourage you to review your W-4 at least once a year.