1

I am looking at increasing my allowances. Currently I am at 2, one for me and one for my wife. I have a had a home for a full year now and a kid on the way so I was considering increasing my allowances to 5.

To me the math works out like this:
allowances = $4050
increase of 3
total = $4050 * 3 = $12150
paychecks per year: 26
increase per check: $467.31
Tax? : 0.667
Result per paycheck: $311.70

Does this look right? Do allowances get taxed?

  • In order to calculate the change in your taxes per check, you have to tell us how much you make. Either per pay or annually (per pay is easier, as we'd have to convert an annual number to be per pay). You already provided pay period, marital status, and number of allowances. To calculate whether you will get a refund or owe money at the end of the year, we'd need to know your total income and itemized deductions (or we'd have to assume that you don't itemize). If your wife works, remember that you can only claim allowances once each. So five total, not five each. – Brythan Feb 13 '18 at 13:12
4

"One for me and one for my wife"

In the old days (the tax code prior to the one implemented for 2018), the tax process included "exemptions," a $4050 per person deduction against income. In other words, a family of 4 had $16K that would not be taxed, along with the rest of the math of their return, whatever their other deductions were, standard vs itemized, etc.

The W4 used the term "allowances". One "allowance" meant "please don't tax $4050 worth of my income." It could have been from a person or from $4K worth of mortgage interest, etc. Again, to be clear, a schedule A offering me $40K worth of itemized deductions might result in 10 allowances.

Now, there are no exemptions. So, the question you asked about the baby, has an answer but not based on an exemption, rather the child tax credit.

The W4 does not appear to have been updated yet. But Publication 15 is ready for 2018. In my opinion, the W4 calculators always left a lot to be desired, and going right to Pub 15 made the most sense. You can do a dry run of your taxes, estimate your total tax bill, and look up on Pub 15 exactly how many allowances to claim to get close to your total payment goal.

3

Allowances are not extra income, that is a misconception.

Income gets taxed. Allowances are income that is consider temporarily tax-free when you get it, meaning it is assumed that you will have according reasons at the end of the year to not have to pay taxes on it.

So increasing the allowances reduces your taxable income on each check, results in less federal tax being deducted, and that results in more net pay. The exact amount depends on your income and the taxes you currently pay.

you can consider it kind of similar to getting an estimated tax-refund in each paycheck (instead of getting it next year at once).

  • So does the increase per check amount look correct? – jacksonecac Feb 13 '18 at 12:56
  • 1
    i doubt it, as you don’t pay 66.7 % tax. – Aganju Feb 13 '18 at 12:57
  • By that I mean this: increase per check: $467.31 omitting the tax – jacksonecac Feb 13 '18 at 12:59
  • @jacksonecac The allowances do not increase the amount you get in your check except by shielding you from tax. If you neglect tax, the amount is 0. So the math can't be right, as it doesn't match reality. – Brythan Feb 13 '18 at 13:05
  • @Brythan then how can an allowance be worth $4050? – jacksonecac Feb 13 '18 at 13:09

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