How many dependents should I claim to mazimize take home pay without owing at tax time?

Question

Just looking for an estimate only. I pay Federal/State as single head of household. I have gotten married and had 3 children since I began my job 7 years ago and never updated my status. We get a generous $7000 range tax return every year which is great (I make around $70,000). However now I would like to maximize my take home pay without owing money back each year. I have since changed to married with 1 allowance. I fear adding additional allowances. I am no longer interested in a refund, just want to come as close to even as possible.

Answer 1

Does your wife work? If so, it will affect my answer. My answer is based upon your wife not working.

For 2008, you can claim one allowance for every $3500 in planned deductions on your W-4 to come as close to breaking even for the year. Planned deductions include your personal exemptions and the greater of the standard deduction or itemized exemptions. Since you have children, you can convert your Child Tax credit into deductions and adjust your tax withholdings.

If your wife works, you can only claim the total allowances that you determine.

When you file your tax return for 2007, you can use that as a guide for your planned deductions as long as you don't expect any significant changes for 2008.

Here is a simple example of how this works. Assuming that you don't itemize, file MFJ, and you are in the 25% marginal tax bracket, you should be able to claim 11 allowances ( $10,700 standard deduction for MFJ + $17,500 for 5 personal exemptions + $12,000 ( $3,000/25%) to convert the Child Tax Credit into deductions = $40,200 in planned deductions) and still get a small refund. $40,200/$3,500 = 11.5 allowances. When you file your taxes, you will need to determine your marginal tax bracket before any credits are applied.

You can read IRS Publication 15 to verify the calculation.

Answer 2

You can use one of the online calculators to estimate your tax liability. What was your tax liability this year? Did you get a refund of all taxes withheld? Do you qualify for EIC? It honestly will depend on your income. If you earn a lower wage, and file as head of household, you may not have a tax liability at all. In this case using 7 exemptions is great. I'm a single mom of 1, and I claimed 6 exemptions for years when I was only making around 16k-20k/year. Now that I'm earning a higher wage, I claim 3 exemptions... I still usually end up with small refund, but it's pretty close to even. I've found the worksheet is pretty accurate, you could always claim 4-5 if you're uncomfortable with 7.

Answer 3

I would talk to a tax professional for a better estimate, but i think you can at least claim as many dependants that you support that can't be claimed by anyone else. So if your wife doesn't work, and you have three children, you could have at least 5 (yourself, wife, 3 kids). Getting a $7,000 refund is nice, but getting that money and being able to make interest on it (in a Money Market account or by investing it) would be much better.

Answer 4

Or you could take one more this year and see how much of a refund you get, then make further adjustments next year if your refund is still sizable.