How many exemptions to claim on a W-4 is an age-old question. Unfortunately, the way withholding is computed has changed and there is now a bit more to consider.
When the 2017 Tax Cuts and Jobs Act was passed, personal exemptions were taken away. In the old process, the calculation would look at the number of exemptions a person claimed, plus the standard deduction for their filing type. It would then divide the total by the number of pay periods from their employer, and subtract the result from taxable wages. The withholding table would compute the amount of tax based on the tax for that level of taxable wages. As a result of the formula, people with large itemized deductions would increase their exemptions to reduce the amount withheld and, for those with non-wage income, they would reduce their exemptions to increase the amount withheld. Due to the change in the law, this no longer works because it never asks you for a number of exemptions.
The new W-4 form asks about:
- Filing status
- The amount of your income and number of children you have that are under age 17, so that it can consider the child credits that you will qualify for
- An estimate of income not subject to tax (eg., interest, dividends, social security)
- The amount of deductions in excess of the standard that you want to be considered in the computation
Based on these inputs, the tax withholding is computed by the payroll system.
Long story short “how many exemptions should I claim?” is no longer a simple question. So, what are the options?
- Individuals or their CPAs can visit the website www.irs.gov/W4App which walks through a series of questions to help complete the W-4
- A CPAs tax planning software can also determine the answers to the questions on the W-4
When in doubt, it’s always advisable to contact your tax preparer.