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My spouse stopped working due to illness and we're adjusting the deductions I'm currently claiming. This is a part of taxes that I've never understood well, other than the basic, more deductions = more money in each paycheck.

Currently, I'm claiming two federal and two state. Last tax season, we owed the feds about 600 dollars but received a refund from the state to the tune of 2600 dollars. My spouse was working two part time jobs at the time we filed.

In essence, are there some guidelines here I could follow to get an idea of how to about break even next tax season or to at least hold on to a little more of each paycheck? Even before this most recent event, clearly my deductions could use adjustment. Could anyone give some pointers?

More context if it's useful: I live in California and my taxes are fairly uncomplicated. I work a salaried, white collar job. We don't have investments, equity or assets other than my tiny 401(k), neither of us are legally disabled, veterans/government employees or people with any other special statuses. We have no children or other dependents. We file jointly as a married couple for both federal and state.

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For federal taxes the rule is fairly straight forward, assuming that nothing else changes during the year. If you know your marginal tax rate (the rate that your last dollar of income is taxed at) last year then adding or subtracting an allowance on the w-4 form will move the amount withheld by rate x Personal exemption amount. The personal exemption for federal taxes in 2017 is $4,050. Lowering the number of allowances on the Federal W-4 increases the amount of money withheld during the year.

So for your federal W-4 form lowering the number of allowances by one if you are in the 25% bracket will cause an additional 25%x4050 or ~$1012 a year to be withheld. Of course making the change 5/12ths of the way trough the year will mean that it will only increase the the amount withheld the rest of the year by (7/12) * $1012 or ~$590 for the rest of the year.

State taxes can be more complex due to issues regarding tax brackets, and the differences in how they calculate their taxes. Most state websites have a worksheet for making an adjustment to their version of the W-4. Here is the form DE-4 form for California

In your situation getting the numbers on the federal and state forms will be much more complex, because your combined income for 2017 will be significantly different than your combined income for 2016.

In the case of multiple incomes getting the withholding correct is much harder even with stable income. The trick is that making the adjustment on the job with the highest income may not move the amount withheld as much as you expect. For example if the largest income is only withheld at the 15% rate but your combined income from all your combined jobs results in you being in the 25% bracket, then the above calculation would only move the amount withheld by $354 instead of $590.

A couple of notes: the number of allowances on the federal and state W-4 forms don't have to match. Mine almost never do. The number of allowances on the W-4 forms doesn't have to match the number of exemptions on the 1040 form.

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The IRS offers an online calculator to help you select the correct number of deductions on your W-4. The tricky part is that we're nearly half-way through the year, so if you add more deductions to offset the lower withholding during the first half of the year, you'll have to update the W-4 at the beginning of next year to correct that next year.

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Follow the instructions on the W-4. It says exactly how you are supposed to calculate the number of allowances. You shouldn't have to figure out how to get the right number. Just follow the instructions.

The only part at all complex is if you have large deductions. In that case you're supposed to subtract a standard amount from your actual deductions -- for 2017, $12,700 if married filing jointly -- divide by $4,050, and then add the result to the number of allowances.

In general, following the instructions on the W-4 should result in slightly more tax being withheld from your paycheck than you actually owe, so that you get a modest refund next April 15. In the long run it doesn't matter if you have too much withheld, as you'll get it all back eventually anyway. I suppose the withholding could be so high that it doesn't leave you enough to live on while waiting for your refund, but that shouldn't normally be the case. If you pay too little, you could be subject to penalties and interest, so you really want to avoid that.

  • You can underwithhold by $1000, or 100% of the taxes paid the prior year and not be subject to any penalty or interest; and the IRS can waive any penalty if the spouse became disabled in that year (OP only states illness): irs.gov/taxtopics/tc306.html – user662852 Jun 30 '17 at 20:52
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    @user662852: that's confusingly stated. Putting it positively, you're okay if your withholding covers this year's tax minus $1000 or 10%, or 100% of last year's tax for most people (110% for >$150k AGI, ~67% for farmers and fishermen). In this case, where spouse stopped earning, this year's tax will presumably be less than last year's, so withholding at 100% of last year is excessive. Good point about disability. – dave_thompson_085 Jun 30 '17 at 21:51

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