If I am buying a house in 2008, should I change what I claim in W-4 tax form?

Question

I currently claim Single-1 on my W-4. I was told I could change to Single-4 or Single-5... how do I figure out what to claim?

Theory I was told... get more money back to equalize refunds due to owning a home so I get close to a 0 refund/owe at the end of the year. (Thats what I currently due with Single-1)

thanks!

Answer 1

Don't change anything until you have actually closed on the home and can evaluate your situation. Most new homeowners are shocked to learn the true minimal value that the mortgage interest and property tax deductions bring to the table. They must exceed your standard deduction to be worth claiming and even then you only benefit from the excess over your standard deduction amount. This is particularly true in the year of purchase as you don't have a full 12 months worth of deductions to claim.

If your total interest and property taxes were $7,500 and you are a single taxpayer, the value of the deduction is only $2,150 ($7,500 - $5,350 standard deduction) and if you're in the 25% tax bracket that will save you $537.50 in taxes. That's about ONE withholding allowance worth of taxes. If you jacked your withholding allowances to 4 or 5, you'd be owing a couple thousand at tax time, plus possible penalties and interest for underpayment of taxes.

Sit tight where you are right now and then run the numbers AFTER you close and know what the impact will be. Better yet, wait until you file your returns for the fist year and THEN project what the next years numbers will look like and adjust accordingly.

Answer 2

It depends on how much your itemized deductions will be. Your savings then depend on your tax bracket.

To make a rough estimate of the changes you can make to your W-4, add up the interest and real estate taxes you expect to pay on the house in 2008, plus whatever state and local income tax you expect to pay, plus any charitable contributions. Subtract $5350, then divide that answer by $3400. Round down - if the answer there is 3.62, make it 3. You could probably safely add that many allowances to the number you are taking now - if the answer is zero, don't change anything. The tax bracket part of the calculation is taken care of by the IRS tables that control what's taken out based on your W-4.

Remember that if you buy the house sometime in 2008, you won't have the whole year's interest and real estate taxes to pay for 2008.

A lot of people buying houses have the mistaken impression that they will get all or most of their interest back from their taxes. This is far from correct.

Answer 3

Easiest way to see this is to go back to your last federal tax return and recalculate your tax as if you owned the home and itemized the mortgage interest and taxes you will pay next year. That will give you a rough idea of how much you should reduce withholding on your W-4 for next year.

Answer 4

it depends on when u buy the house.early in the year is best to get the benefits of deducting real estate taxes and mortgage interest.at H&R Block we use a w4 planner that shows exactly the optimum choice