Thursday, April 16, 2009

Should I increase my exemptions on my W-4?

Tax day is over but I got a question yesterday on an issue that will affect what your return looks like next year:
Should I increase my exemptions? I have two now. If I increase it to three or four, I get more $$ now than later, right?

As a general rule, if you increased the number of exemptions on your W-4 form, your taxable income would drop and thus your take home pay be better. But that doesn't mean it's always a good idea. The important thing is to make sure you're taking the right amount of exemptions for your situation, and that's pretty easy to figure out.

Most people never read it, but at the top of your W-4 form is a worksheet that asks basic questions like how many dependents you have and whether you'll be claiming an exemption for child care. Everyone can claim at least one exemption for themselves. In years past, I didn't even take that because freelance work typically increased my taxable income enough that claiming myself would leave me owing at the end of the year.
This year my situation is different: I won't do much freelancing and I also have custody of my oldest son for the first time. With a lower gross income and a slew of changes to my living situation, all of a sudden I'm eligible for six exemptions according to my W-4 worksheet, instead of the zero I used to claim.

Keep in mind that the number of exemptions you take doesn't have to match the number on your worksheet, which is only a guideline. Think about your situation and take the number you think maximizes your take-home pay without leaving you at risk of owing the government at the end of the year. And remember that getting a big tax refund isn't a good thing; it means you were paying Uncle Sam too much all year long instead of spending your own money.

No comments: