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I originally filled in my W-4 with "1" for items A, B and C of the "Personal Allowances Worksheet" since my wife wasn't working and I have only one job and we're filing jointly.

A Enter “1” for yourself if no one else can claim you as a dependent

B Enter “1” if:

• You are single and have only one job; or

• You are married, have only one job, and your spouse does not work; or

• Your wages from a second job or your spouse’s wages (or the total of both) are $1,500 or less.

C Enter “1” for your spouse. But, you may choose to enter “-0-” if you are married and have either a working spouse or more than one job. (Entering “-0-” may help you avoid having too little tax withheld.)

However, my wife started working around July and she has very variable income. I am trying to work out our estimated taxes due to her new jobs using form 1040 ES. On the "2016 Estimated Tax Worksheet", item 4 (exemptions) it says:

4 Exemptions. Multiply $4,050 by the number of personal exemptions. Caution: See Worksheet 2-6 in Pub. 505 to figure the amount to enter if line 1 is over: $155,650

So originally this would be 3*4,050 but now that she has a job I would mark 0 on items B and C on the W-4 and this amount will be only 4,050 (our joint salaries is below $155,650).

My questions:

  • When I file my income tax for 2016, should I consider one exemption or three exemptions?

  • If I consider one exemption, and considering my wife made LESS than the exemption amount we're not being granted due to the fact that she worked in 2016 (i.e. items A and B on the W-4: 2*4,050=8,100), does that mean we have to pay more taxes than what she earned, and in the end she might as well have stayed at home?

  • Form 1040-ES is normally only used if you are sending in estimated quarterly tax payments directly to the IRS. Are you sending in quarterly payments? – Ben Miller Sep 22 '16 at 4:49
  • Are you or your wife self-employed? – Ben Miller Sep 22 '16 at 4:52
  • @Ben no we are not self employed – Phil Sep 22 '16 at 4:54
  • And yes I was looking at the form for quarterly payments but likely will have to use the annualized income method instead. My biggest concern however is if I will have to pay a lot more taxes than I thought – Phil Sep 22 '16 at 4:56
  • Why would you have to send in quarterly payments if you are receiving a paycheck from your employer with taxes withheld? – Ben Miller Sep 22 '16 at 4:57
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I think you are confused about a few things. (Either that, or I am confused by your question. :) Let's try to clear up the confusion first.

Form 1040-ES is used only if you are sending quarterly estimated tax payments directly to the IRS. This is normally done if you are self-employed. Since you are not self-employed and taxes are withheld from your paycheck, you most likely do not need to send in quarterly estimated tax payments, and you won't need Form 1040-ES.

Form W-4 is your control for how much tax is withheld from your paycheck. Generally, you can claim any number of exemptions on this form that you like, and you can change it at anytime. Fewer exemptions will result in more tax withheld; more exemptions will result in less tax withheld.

When you fill out your 2016 tax return next year (Form 1040), you claim the correct number of exemptions for your situation, which does not have to match the number you claimed on your W-4. If you had too much withheld from your paycheck, you get a refund; too little withheld, and you need to make a payment.

On your tax return, you will claim 2 exemptions: one for you, and one for your wife (assuming that you have no kids), and you'll get to deduct $4050 for each exemption, for a total of $8100. This would be true whether or not your wife was working, and is true no matter what you put on your W-4.

And, except for a few rare circumstances, you come out ahead when you earn more money. The tax brackets are set up in such a way that when you earn additional income, your tax burden won't go up by more than your income went up.


Now, to address the amount of tax withheld, so you don't end up with a high tax bill at the end of the year:

If you decide that you will have too little withheld from your paychecks and you want more withheld, you can submit a new W-4 to your employer. You said you originally claimed a "1" for A, B, and C on the W-4 Personal Allowances Worksheet, which I take to mean that you claimed 3 exemptions on your W-4. You can reduce this number to have more withheld. If you change it to 2, 1, or even 0, you'll have more tax withheld from your future paychecks.

If you want a finer control than that, you can keep the exemptions the same, but use box 6 on Form W-4. This box allows you to specify an additional amount of tax you want withheld from each check. For example, let's say that you estimate you will be $2,000 short on your taxes at the end of the year, and you have 6 paychecks left for this year. You could submit a new W-4 to your employer and put $333 in box 6, which will end up withholding an additional $2000 by the end of the year. Then at the start of the next year, you may want to submit a new W-4 again, because your situation will have changed.

The IRS has an online withholding calculator designed to help you figure out how to adjust your W-4. Alternatively, you can take a look at Form 1040 and fill it out with estimates for what you think your income and withholdings will be at the end of the year, so you know how much you'll be short. (Note: The Form 1040 that is currently available is for 2015, but it will be close enough for estimating purposes.)

  • Those were precisely my concerns :) so due to her being at work I must claim two exemptions (rather than three) and therefore must prepare myself to pay an extra $4050 when I file my taxes. – Phil Sep 22 '16 at 13:37
  • @Phil, I think you are still confused. You can only claim 2 exemptions on your tax return (1040), and that doesn't change whether or not your wife has a job. The number (3) that you claimed on your W-4 only affects how much tax is withheld from your paycheck. Your wife having a job does not negatively affect your situation. Sure, you'll pay more tax, but your wife will make more money than your taxes will go up. As I discussed in the last paragraph, you should estimate your income and your tax for the year using one of the two methods I mentioned, and then adjust your W-4 accordingly. – Ben Miller Sep 22 '16 at 13:45
  • @Phil Also, you are misunderstanding what a personal exemption is. You get to deduct $4050 of household income for each person in your household. For two people, that is $8100. But that is not $8100 off of your taxes, it is $8100 off of your income. Tax savings on that would depend on your tax bracket: in the 25% tax bracket, 2 exemptions results in a tax savings of $2025. – Ben Miller Sep 22 '16 at 13:52
  • @Phil I suggest you read my answer again and the answers on this question, and if there is something in here you don't understand, ask about it. Many of the statements you are making are simply incorrect. – Ben Miller Sep 22 '16 at 13:56
  • Thanks @Ben. I simulated our situation using Form 1040 and now things are a lot clearer. I was confused about personal exemptions, and also the difference between declaring the exemptions on 1040 and the numbers I claimed on the W-4. – Phil Sep 22 '16 at 14:33

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