When you file Form W-4, your employer uses this information to withhold the correct federal income tax from your pay. Withholding allowances vary from person to person based on a number of circumstances, including: Show
The more withholding allowances you claim, the less tax is withheld from your wages. If you don’t file a W-4, your employer must withhold tax from your wages at the highest rate. It’ll be as though you’re single with zero allowances. If you’re a parent, you’ll claim child credits worth up to $2,000 for each eligible child. The number of withholding allowances you claim depends on the number of your eligible children and your income. The IRS might ask your employer for your W-4 depending on your number of tax withholding allowances. If the IRS questions the number of exemptions you claim, you’ll have to justify your claim. Changing Your Withholding AllowancesSince your circumstances might change from time to time, it’s important to review your tax withholding allowances on a regular basis. Life changes that might determine your withholding allowances include:
In 2021, each withholding allowance you claim reduces your taxable income by $4,300. If you claim more allowances than you have a reasonable basis for, the IRS can penalize you. To help determine how many tax withholding allowances you should claim, it might help to look at your returns or payments from previous years. If you received a large refund, consider increasing the number of allowances you claim so less tax is withheld. If you paid the IRS a large sum when you filed your return, decrease the number of allowances you claim. An H&R Block professional can help answer any further tax withholding questions you might have. Is Anyone Exempt From Withholding?You must have tax withholding if all of these apply:
You can make much more and still be exempt from withholding if no one can claim you as a dependent. If you owed no federal tax last year and expect to owe none this year, you might be exempt from withholding. For 2021, a single person who isn’t a dependent can have as much as $12,550 in gross income before any tax is due. Working Couples and WithholdingIf both you and your spouse are employed, figure the total allowances you’re both entitled to. Then, divide those total allowances between you and your spouse. The W-4 has a special worksheet for two-earner couples. It helps you and your spouse figure the number of allowances you should each claim based on each income. Withholding and Retirement IncomeYou can have federal income taxes withheld from your:
With other retirement plans, you might need to file a form with the payer to stop required withholding. If you don’t complete withholding forms for pension benefits, taxes will be withheld like you were married and had three exemptions. So, taxes will only be withheld if your pension is at least $1,680 per month. You should re-evaluate each year to see if you want to have taxes withheld. Use W-4P to have taxes withheld from your:
Use W-4V: Voluntary Withholding Request to have taxes withheld from Social Security. Choose one of these rates for Social Security withholding:
To learn more, see Publication 505: Tax Withholding and Estimated Tax at www.irs.gov. Lump-Sum Pension PayoutYou might have received a lump-sum payment from your retirement plan. If so, the plan administrator must withhold 20% for federal income taxes. You can roll the money over into an IRA or another tax-free pension plan yourself. If so, the tax withholding requirement is 20%. This applies even if you retire, quit, or are laid off. If 20% is withheld, you’d be prepaying tax you might not owe. You probably won’t owe it if you roll over the distribution within 60 days. You could handle the rollover yourself by taking the check and depositing it in a rollover IRA within 60 days. If you do:
You can avoid the 20% withholding by doing a direct rollover. To do a direct rollover:
If done this way, the transaction will be tax-free for you. Tips and WithholdingAll tips you receive are taxable income subject to withholding. If you receive $20 or more per month in tips, report that income to your employer. Tip income you report will show up on your W-2, Box 7 (Social Security tips) and Box 1 (Wages). To learn more, see the Tip Income tax tip. Related TopicsStates eFile Adjustments and deductions Dependents
Related ResourcesFiling for a Deceased Taxpayer If you need help handling an estate, we're here to help. Learn how to file taxes for a deceased loved one with H&R Block. Don’t Overlook the 5 Most Common Tax Deductions From retirement account contributions to self-employment expenses, learn more about the five most common tax deductions with the experts at H&R Block. New Baby, New House or New Spouse? How Major Life Changes Affect Your Taxes Getting married? Having a baby? Buying a house? Go through your life events checklist and see how each can affect your tax return with the experts at H&R Block. Spring Cleaning: Your Household Goods, Your Tax Deductions Donating household goods to your favorite charity? Learn the ins and outs of deducting noncash charitable contributions on your taxes with the experts at H&R Block. |