Your synopsis is correct, but adding two or more dependents shouldn't change ones tax withholding enough to hurt them come April 15.
Your synopsis is correct, but adding two or more dependents shouldn't change ones tax withholding enough to hurt them come April 15.
Again, you are confusing claiming “dependents” on your tax return with claiming “allowances” or what is also known as withholding “exemptions” on your form W-4 for employment withholding. They are not one and the same. And BTW, I would have loved to have claimed my 3 cats and my slacker niece who I often loaned, i.e. gave money to, even when she and her two kids lived with me for over 2 years and I basically supported them, on my tax return, and I would have also loved to have claimed half of the City of Baltimore as “dependents” when I lived there, but I couldn’t.
On your W-4, you can claim as many withholding allowances/exemptions as you want, reduce your federal tax withholding to zero if you want; that is until you file your return and end up owing more than $1,000. And it doesn’t matter if you can write the US Treasury a check when you file your return on or before April 15th, if you exceed the $1,000 amount, the IRS can, except under some circumstances, still penalize and charge you interest for under withholding during the year. They can also fine you, even put you in jail for filing a fraudulent W-4 (although I don’t think that happens often except in cases where people repeatedly claim ridiculous and unsupportable number of withholding exemptions year after year as in an attempt to “evade” paying tax). Word to the wise; tax “avoidance” is perfectly legal as long as it is done legally, tax “evasion” however is always a crime comes with serious consequences.
That and they (IRS) can send your employer a “lock in letter” that states no matter what W-4 you have on file or what form W-4 “Bushbacker1” gives you after receipt of this letter, you will withhold “Bushbacker1” as Married with 1 Exception, period, until you receive a letter from us (the IRS) telling you otherwise.
Depending on one’s financial circumstances, the number of dependent and deductions they can legally claim on their 1040, pre-tax payroll deductions, etc., yes, absolutely claiming two or more “dependents” exemptions could put some folks in a situation of being seriously under withheld. Take for example a single person, un-married, no children, no mortgage interest, no other allowable deductions on their 1040, does not have any pre-tax payroll deductions for section 125 cafeteria plans, does not contribute to his employer’s 401k plan through pre-tax dollars but makes say a salary of 30k or more a year and has several thousands in an interest baring savings account, …. claiming even 3 or 4 exemptions on their W-4 could very well put them in a position of owing substantially more than $1,000 on April 15th.
I’m not advocating “feeding the beast” but am strongly advising you and everyone on this thread to be very cautious when “playing games” with their withholding on employment income.
What you really want to do is have the “Goldilocks” amount withheld from your paycheck – not so much that you get a big refund, i.e. provide the government with what is in effect an interest free loan on your money that you could have invested during the year, even in a savings account with a very small return – that is still a return; and not so little that you owe any more than a few dollars, no more than a $100 or so when you file your return. This takes some work and planning but it can be done. I advise people to look at the YTD’s on their paystubs, estimate their current and expected tax situation and estimate where they will be, each and every quarter and adjust their W-4 withholding accordingly as to get to the magic “Goldilocks Zone” at year end. For instance; last year I got a $10 refund from the IRS and owed $8 in PA State and local taxes. That’s where you want to be - as close to zero taxes refunded or owed as possible.
As a payroll professional with over 30 years of experience, I’ve seen it all. I’ve seen a good number of folks claiming over 10 exemptions or more (50 to 99 exemptions when I knew they were single or married with 1 kid) or claiming “Exempt” on their form W-4, even as I “gently” asked them if they really wanted to do that, only to get, sometimes several years later, an IRS and or State treasury wage garnishment and an IRS lock in letter for those very same people. Sadly I often see some of those very same people get child support orders, wage garnishments for defaulted student loans…trust me; it’s not pretty.
Recently we hired a new employee in sales. And it only took less than two weeks to get the child support withholding order (child support orders always take first priority, no matter when it is received). Then less than a week later, I got a California wage garnishment for unpaid state taxes, then another for local CA taxes, then an IRS garnishment and finally another child support order to enroll his child in all available health benefits. After the child support orders, there is not enough “discretionary” income to take anything for any of the other garnishments unless he earns a big commission in which case most of that will be taken in garnishment. Meanwhile, penalties and interest continue to accrue for every month that he doesn’t earn enough to have anything other than child support taken out. I feel bad for the guy but he’s in a hole so deep, he’ll be feeling this pain for a very, very long time.
Even absent child support or creditor or student loan wage garnishments, you really don’t want to get into a hole with the IRS and or on your state on taxes owed.
I’ve run across people like you who say; ”I want the absolute minimum amount or even zero to be withheld from my pay and I will just work it out and pay my taxes on April 15th.” Word to the wise – while I understand and empathize, this “tax strategy” often it does not end well.