Q. Can a person claim more dependents or allowances on their W-4 in order to increase take-home amount and then declare an accurate number on 1040? If over payment is expected and then a refund is due, can he simply handle it this way and get the cash during the year instead of as a refund? Is this legal?
A. I’ve talked about this in other blog articles but this is one of the most frequently asked questions I get from my clients. There are two ways to look at your question.
1. Dependents claimed on your tax return are often not the same as allowances on the Form W-4. Allowances on the W-4 are designed to reduce your income by the amount of non-taxable income calculated on your tax return. For instance, a single person not supported by someone else who has one job and rents an apartment alone with no investment income or self-employment income would be allowed to claim a dependent allowance for themselves on the 1040 form. They would also be allowed to claim a standard deduction. For 2015, the standard deduction is $6,300 for singles. For 2015, the allowance value is $4,000. For this scenario, the individual would claim (6300+4000) 10,300/4000 or 2 allowances on a W-4 form. For those who itemize and have additional dependents, the calculation still requires someone determine the income not subject to tax (itemized deductions, student loan interest, dependents, etc.) and divide it by the value of an allowance. The object is to get your tax withholding from your paychecks to match what you actually owe which is calculated on your 1040 form. You don’t want a big refund, and you don’t want to have a big additional tax bill.
2. Following the logic of that last sentence, if you decide to claim more allowances than are valid for your situation, you will end up not paying enough tax through withholding for the year. This is not a smart move and could subject you to underpayment penalties and even interest. While a case could be made that it is legal, you must verify when you submit a W-4 to your employer that the number of allowances you are claiming is valid for your situation under penalty of perjury. If you are intentionally claiming too few allowances, you are lying and opening yourself up to some pretty severe potential penalties.
While it’s not fun to pay taxes, it is the law. Proper management of your withholding will keep the money that is yours in your pocket instead of providing an interest-free loan to the government. It will also keep you from paying even more in penalties. That’s really not fun.
Your tax preparation company or accountant can help you complete a W-4 based on the information in your last tax return and your estimates of how things will change in the upcoming year.