Claiming too few withholding allowances on W-4 : big refund?

Question

I have a friend who is claiming too few withholding allowances on his W-4. He believes that his "withholding allowance" on W-4 should be the same number as his "personal exceptions" on 1040-EZ. I told him, the number are often the same, but in his case, he can claim higher. He claims 2, for himself and his son, but according to the W-4, he can claim 7.

Why should I worry about this? Because he lives paycheck to paycheck, and often borrows money from friends, until "refund day", when the tax refund comes back. He also pays company XYZ to give a speedy refund. He always complains to me about money woes.

When I asked him to change the number on the W-4, he at first told me, that was illegal to state a higher number then "household people". After I shown him a W-4, he changed the argument to "I like my big returns/I don't want to owe money to the IRS". How can I blow this argument out of the water? Is there a benefit to the Uncle Sam saving program? Thanks for the advice.

Answer 1

What would your son do with the extra money he would get from having less taken out of his paycheck? Would he save it, use it for needed things, or would he blow it? If he would blow it, then he's better off getting the bigger refund. If he would handle the extra money wisely then he would be better off with the extra money in his paycheck, just not so much that he does end up owing the IRS.

Answer 2

Tell him to read the instructions and go through the worksheets - then he'd see that he can claim more than the two he's claiming.

Let's see now, he gives the government an interest-free loan, then borrows money from his friends to make up for it - does he pay interest to you? If not, sounds like he's coming out even, and YOU are the ones subsidizing what he's doing.

By the way, he's not likely claiming his son and filing a 1040-EZ, since you can't claim dependents on the EZ form.

He's got his mind made up - you obviously aren't going to change it. But you could quit lending him money, and quit listening to his money woes. Every time he starts complaining about being short, you could say "you wouldn't be so short if you claimed more on your W-4" until he gets tired of hearing it

Answer 3

my mom does that too, she doesnt' understand that the goal is to be as close to 0 when you do your taxes at the end of the year.

It's not illegal so he can't get in trouble for it, it's just not the brightest idea he's ever had I guess if he's borrowing money

My advice is to not let him borrow your money and to tell him that he's probably losing money by letting XYZ give him an advance on his refund because they never give you the whole thing or it wouldn't be beneficial to that company

Answer 4

First off you have it backwards. If you claim a low number on your W4 they withhold more throughout the year, which increases what you may have refunded. The more deductions you claim on the W4, the less they withhold, the smaller the refund.
His logic is correct, he's going for the larger refund. It may not be the best way to save money since their is no interest accumulated and he then pays someone to file to get the refund. BUT, how much money would he save throughout the year on his own. It doesn't sound like much. At least this way, once a year he has money and hopefully pays off some debt.
You can be penalized for underwithholding, (too many on a W4) but not if you follow the guidelines for what they say you can withhold.

Answer 5

This is easy. Next time he comes sniffing around for a loan, tell him that the "Bank of Jim" has closed for good, until he gets his financial house in order. It's his problem, but you don't have to be part of it.

Answer 6

Next time he comes looking for a loan, tell him he'd have the money if he claimed more exemptions.