Wife started working on 3Q - how many exemptions can we claim?

Question

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?

Answer 1

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.

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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.)