Decrease withholding on paycheck

Q. I would like to ask how I can decrease the withholdings from each paycheck…I am married, salaried about 52K yearly; HR explained to me that I needed to increase the number of dependents (?!) I bought a house, I will therefore deduct the mortgage interest and the taxes. I live in Florida. Thanks for your help!

A. I get so many W-4 questions that it’s almost impossible to know where to start. Your HR department has an interesting suggestion. By increasing dependents, you can reduce withholding. The terminology is wrong though. A dependant is defined as a child, someone you care for in your home, and sometimes freeloading friends. That’s probably not the best way to change withholding. They really mean claim a different number of allowances.

In this case, you need to understand what a withholding allowance is. For 2008, each allowance equals $3,500. That means for each $3,500 of items that will reduce your taxable income, you can claim 1 additional allowance on your paycheck. If you are buying a home, you will begin paying taxes and interest on that purchase. The interest is tax deductible if you have enough interest and other items from the 1040 Schedule A to add up to more than the standard deduction for your filing status. I’ll discuss that at a later date. Let’s just assume that you can indeed itemize and your total itemized items will add up to $21,000. To determine the number of allowances that this equals on your W-4, simply divide 21000 by 3500 which turns out to be exactly 6. If you take a look at the federal W-4, you will see a worksheet on page 2 that can help you determine how many additional allowances, if any to include in your allowance number on line 5 page 1.

I need to discuss one more thing before closing this edition. The number of allowances claimed moves inversely to the amount of withholding taken from your check. If you claim more allowances, then you are saying that you have less taxable income and thus will have less tax withheld. If you are claiming fewer allowances, you are saying that your taxable income has increased and thus you will have higher withholding.

Check with your CPA or tax adviser to determine if you will be able to itemize. This affects your allowance decision.

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