How to Fill out/Adjust W4 form

jessel.badal · Joined: 16 Feb 2008 Posts: 2

Hi everyone,

I'm sure this topic has been beaten to death, but I would like to get
an answer closer to my situation. I don't want the owe any taxes AND I
don't want to give the government a tax free loan. We end up having a
sizable refund every year, and I would like to keep that money my
pocket throughout the year. Please help, as I am not sure how my wife
and I should fill out/adjust our W4 forms. We are both employed.

Here's our situation: Married, File jointly
We have 3 children.

How should we both have our W4s adjusted (dependents) so that we can
maximize our income and NOT have to pay taxes?

Should we BOTH claim our 3 kids as dependents? Any other tips you may
have?

Thanks in advance,
- Jes

Archived from group: misc>taxes

Phil Marti · Joined: 25 Aug 2007 Posts: 2520

wrote:

> I'm sure this topic has been beaten to death, but I would like to get
> an answer closer to my situation. I don't want the owe any taxes AND I
> don't want to give the government a tax free loan.

Sit down with a W-4 and complete the worksheets as a couple. That process
will guide you to what each of you should should put on your W-4 so that you
wind up with a small refund/balance due.

--
Phil Marti
Clarksburg, MD

taxmama2007 · Joined: 16 Feb 2008 Posts: 3

On Feb 16, 4:26 am, "Phil Marti" wrote:
> wrote:
> > I'm sure this topic has been beaten to death, but I would like to get
> > an answer closer to my situation. I don't want the owe any taxes AND I
> > don't want to give the government a tax free loan.
>
> Sit down with a W-4 and complete the worksheets as a couple. That process
> will guide you to what each of you should should put on your W-4 so that you
> wind up with a small refund/balance due.
>
> --
> Phil Marti
> Clarksburg, MD

You can fill the W4 form to get the number of exemptions. Also try
some
onine tools available to save you some number crunching effort.
http://www.qcktax.com/w4-calculator.php

Dimitrios Paskoudniakis · Joined: 25 Aug 2007 Posts: 17

wrote in message @j28g2000hsj.googlegroups.com...
> Hi everyone,
>
> I'm sure this topic has been beaten to death, but I would like to get
> an answer closer to my situation. I don't want the owe any taxes AND I
> don't want to give the government a tax free loan. We end up having a
> sizable refund every year, and I would like to keep that money my
> pocket throughout the year. Please help, as I am not sure how my wife
> and I should fill out/adjust our W4 forms. We are both employed.
>
> Here's our situation: Married, File jointly
> We have 3 children.
>
> How should we both have our W4s adjusted (dependents) so that we can
> maximize our income and NOT have to pay taxes?
>
> Should we BOTH claim our 3 kids as dependents? Any other tips you may
> have?
>
> Thanks in advance,
> - Jes

An alternative to W-4 worksheets is the brute force approach. The solution
requires a good prediction of your tax burden for the year, knowing your
taxable income each paycheck, knowledge of the formula for your employer's
withholding, and simple algebra.

I developed a simple formula years ago to compute, given the amount of tax
withheld to date, the amount of tax owed at the end of the year, and the
number of paychecks in the year remaining, the average number of withholding
exemptions for the rest of the year required to "break even" at the end of
the year.

Year after year, my tax due or refund is usually well within $50. For 2007
I owe $34. The biggest uncertainty is not knowing how much I will receive
in dividends and capital gains distributions (CGD) in December. Sometimes I
have been able to improve my estimate in December of dividends and CGD by
going to my investment firm web sites where they predict these amounts. I
can then adjust my withholding for the last paycheck or two of the year, to
break even. I then readjust exemptions for the start of the next calendar
year.

The equation becomes more complicated for a married couple with both
working. Another "knob you can dial" with your selected W-4 exemptions is
what percent do you want each of you to contribute toward your combined tax
burden. For example, say of your combined income, you contribute 75% and
your wife contributes 25%. You could opt that the end of year taxes are
contributed 75% by you and 25% by your wife (ie, equitably), or you could
select any other combination you and your wife choose.

If you try this approach, here's what you need:

1. A good prediction of your joint tax burden for 2008

Fill out an imaginary 2008 tax return now. You and your wife presumably
know your salaries, and how much is deducted pre-tax for benefits/retirement
plans. If you receive benefit credits or imputed income on pre-tax life
insurance (above $50,000 of coverage), add that as income, then subtract the
pre-tax benefits/retirement. Based on history, you should also predict your
annual investment interest, dividends, and capital gains distributions
(CGD). Add any other income. The sum is your predicted AGI. You should
know your 2008 mortgage interest, property tax, state tax, charitable
contributions, etc. Deduct these and any other itemized deductions (or if
less than the standard deduction, deduct the standard deduction). I mention
you should know your state tax burden. You should also fill out an
imaginary state tax return now to compute this. Alternatively if you are in
a low state tax state, you can itemize the sales tax deduction. Of your
predicted CGD and dividends, predict from history how much CGD is long-term
at the 15% rate (5% if your joint AGI is less than $65,100), and how much of
dividends are qualified dividends at the lower 15% rate (5% if your AGI is
less than $65,100). Then compute your tax. Depending on your income, you
may be eligible for up to $1000 child tax credit per child. You get full
child tax credit for joint AGI up to $110,000, but phases out to zero at AGI
of $150,000. Subtract the tax credit.

From IRS Revenue Procedure 2007-66, here are the Tax Tables for 2008 for
Married Filing Jointly:

TABLE 1 - Section 1(a) - Married Individuals Filing Joint Returns and
Surviving Spouses
If Taxable Income Is:
The Tax Is:
Not over $16,050
10% of the taxable income
Over $16,050 but not over $65,100 $1,605
plus 15% of the excess over $16,050
Over $65,100 but not over $131,450 $8,962.50
plus 25% of the excess over $65,100
Over $131,450 but not over $200,300 $25,550 plus
28% of the excess over $131,450
Over $200,300 but not over $357,700 $44,828 plus
33% of the excess over $200,300
Over $357,700
$96,770 plus 35% of the excess over $357,700

So with your combined AGI and deductions, you can compute your combined tax
burden accordingly. Remember to pull out your estimated qualified dividends
and long-term CGDs from the equation, then multiply those by 15% (5% if
joint AGI is less than $65,100), then add back to the total. Remember to
subtract a Child Tax Credit of up to $1000 per child from the total. If
your joint AGI is less than $110,000, subtract $3,000. If your joint AGI is
above $150,000 subtract zero. If in between, you lose $25 tax credit per
child per $1000 of AGI above $110,000. Round up to the next $1,000. For
example if your AGI is $125,002, you have to use $126,000, which is $16,000
above $110,000, so you lose 16 x $25 ($400) of tax credit per child, and you
would have a $1800 credit for the 3 children.

For the purposes of this exercise, I will not discuss if you are impacted by
Alternative Minimum Tax, but of course you need to factor that into
consideration.

2. Knowing how much your and your wife's employers withhold for federal tax
each paycheck

First, compute your taxable income on your paycheck. They should show you
this on the pay stub. It is your gross income, plus any benefit credits,
less your pre-tax benefits and retirement.

Also you should know what your current number of withholding exemptions are.
This should also be on your paystub.

Your employers should withhold federal tax according to pages 38 and 39 of
IRS Pub 15 (http://www.irs.gov/pub/irs-pdf/p15.pdf). Go to the table
according to your pay frequency (weekly, bi-weekly, semi-monthly, ...), then
to the section for Married person. This provides the formula. Take your
taxable income from your paycheck. Then multiply the number of withholding
exemptions by the value of an exemption ($3,500 for 2008), then divide by
the number of paychecks in the year (ie 24 if semi-monthly, 26 if
bi-weekly). Subract this from your paycheck taxable income. Apply this
amount to the formula in the table, and this should equate to your
withholding for federal tax on your recent paycheck. If it does not agree,
you did a computation wrong. Recheck until the amount agrees with the
withholding on your recent paycheck.

You need to convert the table formula to an algebraic equation.

Example: Paid semi-monthly (24 paychecks per year), Married filing jointly,
10 withholding exemptions, and your paycheck taxable income is $5,000.

Per Table 3.b on page 38 of Pub 15, after subtracting exemptions from your
$5,000 taxable income, your federal tax withheld is $368.55 plus 25% of the
amount over $3,006.

In equation form, let's call T the tax withheld, E the number of withholding
exemptions, and Y the taxable income.

The tax withheld, in algebraic form, is

T = $368.55 + 0.25 x (Y - E x $3500/24 - $3,006)

If Y = $5,000 and E = 10, then the tax withheld by your employer for the
paycheck is T = $502.47.

If your annual tax burden is close to 24 times this amount, $12059, you'll
be close to break even, and 10 exemptions is correct. Otherwise, you need
to adjust your exemptions.

3. Determine the average number of exemptions needed to break even

The algebra comes in by knowing the tax desired to be withheld each
paycheck, inverting the equation in the table in Pub 15 to solve for the
number of withholding exemptions required.

You need to know your tax withheld to date (on your paystub), and the number
of paychecks remaining (ie if you are paid semi-monthly, you have received 3
paychecks out of 24, so the number remaining is 21). You also need your
total tax burden from Step 1. The difference between total tax owed from
Step 1 and tax withheld to date is the tax needed to be withheld for the
rest of the year. Divide by the number of paychecks remaining. This is the
desired amount to be withheld each paycheck remaining. Using the equation
from the appropriate table in Pub 15, solve for the number of withholding
exemptions needed. The answer will not be an integer, so round to the
nearest integer. If rounding up, you will owe a small amount at the end of
the tax year. If rounding down, you will get a small refund.

You'll have to decide how much of your total tax should be withheld by your
paychecks and how much by your wife's paychecks, then solve for the number
of withholding exemptions for each of you using the formula in the
appropriate table in Pub 15.

Let's use the example above, and say you contribute 75% of the family
income, and want to withhold 75% of the family tax. In this step, you will
have computed T, the average amount to be withheld in tax from your paycheck
to break even, so now you need to solve for E, the number of withholding
exemptions. If you are in the 25% bracket for computing tax withheld as in
the example above, then the above equation, solved for E, becomes

E = [Y - (T - $368.55) / 0.25 - $3,006] x 24/$3,500

Let's say that instead of contributing $12059 toward the family tax
(corresponding to the 10 exemptions above), you need to contribute only
$10,500, so you won't otherwise get a big refund. Then T = $10,500 / 24 =
$437.50 per paycheck. With your taxable paycheck income Y = $5,000, the
number of withholding exemptions E = 11.78. You could increase your
withholding exemptions from 10 to 12. If you had 3 paychecks to date and
each withheld $502.47 for a total of $1,507.41, then for the rest of the
year, you need withheld $10,500 - $1,507.41, or $8,992.59. Over 21
remaining paychecks this works out to $428.22 federal tax withheld per
paycheck, which should be used as T in the equation to solve for E. E =
12.04 for the rest of the year, so starting with paycheck number 4, change
your withholding exemptions to 12 to break even at the end of the year. Do
the same for your wife. Make sure to use the appropriate equation in the
table. You or your wife might be in another withholding bracket than in the
25% bracket in the example. If any result in parenthesis in the equations
is negative, you have the wrong bracket.

If you do it right, you will be close to break even at the end of the year.
Make adjustments as needed if your situation (income, deductions) changes.
Again, this is how I compute withholding exemptions, and I always nearly
break even.

If the computed number of exemptions is nearly halfway between two integers,
you may want to recompute mid-year and adjust your withholding exemptions
then.

You should do the exact same thing with your state withholding exemptions,
so that if you have state income tax, you will be close to break even.

If you or your wife earn more than the Social Security wage base ($102,000
per individual in 2008), you can get more sophisticated to underwithhold
federal tax while paying Social Security, then overwithhold federal tax by
the amount of the Social Security after it is maxed out, to give you a
near-constant paycheck throughout the year, rather than "get a raise" in
take-home pay when you max out your Social Security. This requires
considerably more algebra, but is doable.

I don't understand your question about claiming the children given you file
jointly. If you file jointly, you jointly claim the 3 children. You
already both claim the children. You can't claim them twice, once for each
spouse.

By the way, I'm not a tax professional or in the financial industry at all.
I'm just a regular taxpayer with actual math skills. The foregoing is
intended for educational purposes only and does not constitute legal or
professional advice.

jessel.badal · Joined: 16 Feb 2008 Posts: 2

On Feb 17, 1:30 pm, "Dimitrios Paskoudniakis"
wrote:
> wrote in message
>
> @j28g2000hsj.googlegroups.com...
>
>
>
> > Hi everyone,
>
> > I'm sure this topic has been beaten to death, but I would like to get
> > an answer closer to my situation. I don't want the owe any taxes AND I
> > don't want to give the government a tax free loan. We end up having a
> > sizable refund every year, and I would like to keep that money my
> > pocket throughout the year. Please help, as I am not sure how my wife
> > and I should fill out/adjust our W4 forms. We are both employed.
>
> > Here's our situation: Married, File jointly
> > We have 3 children.
>
> > How should we both have our W4s adjusted (dependents) so that we can
> > maximize our income and NOT have to pay taxes?
>
> > Should we BOTH claim our 3 kids as dependents? Any other tips you may
> > have?
>
> > Thanks in advance,
> > - Jes
>
> An alternative to W-4 worksheets is the brute force approach. The solution
> requires a good prediction of your tax burden for the year, knowing your
> taxable income each paycheck, knowledge of the formula for your employer's
> withholding, and simple algebra.
>
> I developed a simple formula years ago to compute, given the amount of tax
> withheld to date, the amount of tax owed at the end of the year, and the
> number of paychecks in the year remaining, the average number of withholding
> exemptions for the rest of the year required to "break even" at the end of
> the year.
>
> Year after year, my tax due or refund is usually well within $50. For 2007
> I owe $34. The biggest uncertainty is not knowing how much I will receive
> in dividends and capital gains distributions (CGD) in December. Sometimes I
> have been able to improve my estimate in December of dividends and CGD by
> going to my investment firm web sites where they predict these amounts. I
> can then adjust my withholding for the last paycheck or two of the year, to
> break even. I then readjust exemptions for the start of the next calendar
> year.
>
> The equation becomes more complicated for a married couple with both
> working. Another "knob you can dial" with your selected W-4 exemptions is
> what percent do you want each of you to contribute toward your combined tax
> burden. For example, say of your combined income, you contribute 75% and
> your wife contributes 25%. You could opt that the end of year taxes are
> contributed 75% by you and 25% by your wife (ie, equitably), or you could
> select any other combination you and your wife choose.
>
> If you try this approach, here's what you need:
>
> 1. A good prediction of your joint tax burden for 2008
>
> Fill out an imaginary 2008 tax return now. You and your wife presumably
> know your salaries, and how much is deducted pre-tax for benefits/retirement
> plans. If you receive benefit credits or imputed income on pre-tax life
> insurance (above $50,000 of coverage), add that as income, then subtract the
> pre-tax benefits/retirement. Based on history, you should also predict your
> annual investment interest, dividends, and capital gains distributions
> (CGD). Add any other income. The sum is your predicted AGI. You should
> know your 2008 mortgage interest, property tax, state tax, charitable
> contributions, etc. Deduct these and any other itemized deductions (or if
> less than the standard deduction, deduct the standard deduction). I mention
> you should know your state tax burden. You should also fill out an
> imaginary state tax return now to compute this. Alternatively if you are in
> a low state tax state, you can itemize the sales tax deduction. Of your
> predicted CGD and dividends, predict from history how much CGD is long-term
> at the 15% rate (5% if your joint AGI is less than $65,100), and how much of
> dividends are qualified dividends at the lower 15% rate (5% if your AGI is
> less than $65,100). Then compute your tax. Depending on your income, you
> may be eligible for up to $1000 child tax credit per child. You get full
> child tax credit for joint AGI up to $110,000, but phases out to zero at AGI
> of $150,000. Subtract the tax credit.
>
> From IRS Revenue Procedure 2007-66, here are the Tax Tables for 2008 for
> Married Filing Jointly:
>
> TABLE 1 - Section 1(a) - Married Individuals Filing Joint Returns and
> Surviving Spouses
> If Taxable Income Is:
> The Tax Is:
> Not over $16,050
> 10% of the taxable income
> Over $16,050 but not over $65,100 $1,605
> plus 15% of the excess over $16,050
> Over $65,100 but not over $131,450 $8,962.50
> plus 25% of the excess over $65,100
> Over $131,450 but not over $200,300 $25,550 plus
> 28% of the excess over $131,450
> Over $200,300 but not over $357,700 $44,828 plus
> 33% of the excess over $200,300
> Over $357,700
> $96,770 plus 35% of the excess over $357,700
>
> So with your combined AGI and deductions, you can compute your combined tax
> burden accordingly. Remember to pull out your estimated qualified dividends
> and long-term CGDs from the equation, then multiply those by 15% (5% if
> joint AGI is less than $65,100), then add back to the total. Remember to
> subtract a Child Tax Credit of up to $1000 per child from the total. If
> your joint AGI is less than $110,000, subtract $3,000. If your joint AGI is
> above $150,000 subtract zero. If in between, you lose $25 tax credit per
> child per $1000 of AGI above $110,000. Round up to the next $1,000. For
> example if your AGI is $125,002, you have to use $126,000, which is $16,000
> above $110,000, so you lose 16 x $25 ($400) of tax credit per child, and you
> would have a $1800 credit for the 3 children.
>
> For the purposes of this exercise, I will not discuss if you are impacted by
> Alternative Minimum Tax, but of course you need to factor that into
> consideration.
>
> 2. Knowing how much your and your wife's employers withhold for federal tax
> each paycheck
>
> First, compute your taxable income on your paycheck. They should show you
> this on the pay stub. It is your gross income, plus any benefit credits,
> less your pre-tax benefits and retirement.
>
> Also you should know what your current number of withholding exemptions are.
> This should also be on your paystub.
>
> Your employers should withhold federal tax according to pages 38 and 39 of
> IRS Pub 15 (http://www.irs.gov/pub/irs-pdf/p15.pdf). Go to the table
> according to your pay frequency (weekly, bi-weekly, semi-monthly, ...), then
> to the section for Married person. This provides the formula. Take your
> taxable income from your paycheck. Then multiply the number of withholding
> exemptions by the value of an exemption ($3,500 for 2008), then divide by
> the number of paychecks in the year (ie 24 if semi-monthly, 26 if
> bi-weekly). Subract this from your paycheck taxable income. Apply this
> amount to the formula in the table, and this should equate to your
> withholding for federal tax on your recent paycheck. If it does not agree,
> you did a computation wrong. Recheck until the amount agrees with the
> withholding on your recent paycheck.
>
> You need to convert the table formula to an algebraic equation.
>
> Example: Paid semi-monthly (24 paychecks per year), Married filing jointly,
> 10 withholding exemptions, and your paycheck taxable income is $5,000.
>
> Per Table 3.b on page 38 of Pub 15, after subtracting exemptions from your
> $5,000 taxable income, your federal tax withheld is $368.55 plus 25% of the
> amount over $3,006.
>
> In equation form, let's call T the tax withheld, E the number of withholding
> exemptions, and Y the taxable income.
>
> The tax withheld, in algebraic form, is
>
> T = $368.55 + 0.25 x (Y - E x $3500/24 - $3,006)
>
> If Y = $5,000 and E = 10, then the tax withheld by your employer for the
> paycheck is T = $502.47.
>
> If your annual tax burden is close to 24 times this amount, $12059, you'll
> be close to break even, and 10 exemptions is correct. Otherwise, you need
> to adjust your exemptions.
>
> 3. Determine the average number of exemptions needed to break even
>
> The algebra comes in by knowing the tax desired to be withheld each
> paycheck, inverting the equation in the table in Pub 15 to solve for the
> number of withholding exemptions required.
>
> You need to know your tax withheld to date (on your paystub), and the number
> of paychecks remaining (ie if you are paid semi-monthly, you have received 3
> paychecks out of 24, so the number remaining is 21). You also need your
> total tax burden from Step 1. The difference between total tax owed from
> Step 1 and tax withheld to date is the tax needed to be withheld for the
> rest of the year. Divide by the number of paychecks remaining. This is the
> desired amount to be withheld each paycheck remaining. Using the equation
> from the appropriate table in Pub 15, solve for the number of withholding
> exemptions needed. The answer will not be an integer, so round to the
> nearest integer. If rounding up, you will owe a small amount at the end of
> the tax year. If rounding down, you will get a small refund.
>
> You'll have to decide how much of your total tax should be withheld by your
> paychecks and how much by your wife's paychecks, then solve for the number
> of withholding exemptions for each of you using the formula in the
> appropriate table in Pub 15.
>
> Let's use the example above, and say you contribute 75% of the family
> income, and want to withhold 75% of the family tax. In this step, you will
> have computed T, the average amount to be withheld in tax from your paycheck
> to break even, so now you need to solve for E, the number of withholding
> exemptions. If you are in the 25% bracket for computing tax withheld as in
> the example above, then the above equation, solved for E, becomes
>
> E = [Y - (T - $368.55) / 0.25 - $3,006] x 24/$3,500
>
> Let's say that instead of contributing $12059 toward the family tax
> (corresponding to the 10 exemptions above), you need to contribute only
> $10,500, so you won't otherwise get a big refund. Then T = $10,500 / 24 =
> $437.50 per paycheck. ...
>
> read more »

Thanks all for you tips! I will incorporate what I've learned with
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