Need help filling out my w-4, am married, take 1 or 2 allowances?

Question

Hi, I got married last year and am not sure to claim 1 or 2 allowances on the w-4, my wife works as well. I am tempted to claim 2 so I can have less taxes withheld from my paycheck but then I heard talk of a penalty when you have not enough taxes withheld from your paycheck. Is that true? Would I be at risk if I decide to increase my allowance to 2? Was hoping to get more from my paycheck for interest purposes and then just pay what I owe each year during tax filing. Thanks!

Answer 1

The only time an underpayment penalty is assessed by the IRS is when you pay less than 90% of the tax owed throughout the year.

If you claim a 1 or a 2, chances are you will not under pay enough to the point where you are penalized.

Even if you file a 2, unless you have a large amount of intereset, capital gains, or divident income, you will still probably get a few hundred back.

Personally, I file a "0" on all my forms. Sure it is an interest free loan to the government, but it is very nice when you are broke after Crhsitmas to have a 5 figure tax return coming your way.

EDIT:

In case you want a link, here you go:

http://www.irs.gov/taxtopics/tc306.html

Answer 2

Depending on what your joint income is and if you have any deductions, you have to be careful so you don't find yourselves getting hit with a big tax bill.

My husband and I were married Oct 2005. We have no deductions since we don't have kids yet and we can't afford a home here in Southern California.

April 2006 was our first time filing jointly as a married couple. We had both claimed 0 for all of 2005. We received a refund of $2300 and were thrilled!

When we filed this year, again we had claimed M-0 for all of 2006. I thought we would get a fat check from state and federal. I was sooooooo wrong. I didn't take into account that we had both started new jobs in 2006 - both making more money. That put us into an entirely new tax bracket. That, combined with having no deductions to speak of, put us in a horrible position. I was shocked when we found out that we OWED $2500 :-(

I stupidly thought we would be totally safe claiming 0 all year long. Our CPA told us that the only way to avoid this in the future is:

1) Buy a home
2) Have a baby
3) On top of claiming 0, deduct additional money from our paychecks


What a drag huh?

Answer 3

You and your wife together can claim as many as two. You might still owe some at the end of the year, but won't be subject to penalties as long as you owe less than $1000 OR you've paid in at least 90% of what you owe, so you'd probably be OK.

The difference in your paycheck between claiming 1 or 2 probably isn't a lot unless you're in a really high tax bracket.