Deductions for 2011

It is soon time to fill out the W-4 form that tells your employer how many allowances you want for withholding. We are frequently asked "What is an allowance and how many do I have?" So today we answer the question and learn how to complete the treacherous W-4.

The first question is are you married or single. Obvious, no? Not quite. The reason for the question is not to survey the percentages of each. The IRS issues two withholding tables, one for married people and one for single. The differences are due to the difference in tax rates for each status. The tax rates for single people escalate quicker (get bigger at lower incomes) than for married people. Naturally, if you are single you should check the single box. But if you are married and both spouses work, one of you should probably check the single box (or the married but withhold at single rate). This will make sure you have enough money withheld to avoid owing a lot next April.

Now the tricky part. How many allowances are you claiming. There is a complicated formula at the top of the form to "help" you determine this number. Don't try to complete it as it will drive you insane. The starting point is to claim allowances equal to the number of exemptions on last year's return. That is one for you, one for your spouse and one for each child you have. If you stop at this point and write that number down, you should be safe in having enough money withheld. If you itemize your deductions, you can increase this number by one for every $5,000 in deductions.

Increasing the number of allowances will reduce the amount withheld out of your check. But if you don't withhold the correct amount (90% of your total tax for the year) the IRS will charge you a penalty for underpayment. Finally, if you and your spouse both work, we recommend having the lower paid spouse elect to be withheld at the single rate with 1 allowance. The tax tables calculate your tax assuming that only one spouse works. So if both work, the tables calculate the lower rates on the first $50,000 of income for both spouses.

We know this is a long explanation of what should be a simple form to complete. As always, please call (949-683-8111) or email us at info@southcountycpa.com if you have any questions. We are here to help.