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How do I adjust my tax witholding?

This article is the first in a three-part series covering the W-4 form, also known as the "Employee's Withholding Allowance Certificate." The purpose of the W-4 is to set or adjust how much federal income tax is withheld from your paycheck. While it's a simple concept, the IRS system of tax table withholding based on filing status and personal exemptions is designed for a very narrow set of circumstances. If you deviate from the criteria, the form will provide a few simple adjustments, or refer you to the 19-page Publication 919, How Do I Adjust My Tax Withholding?

Exemption allowances

The W-4 is all about your tax filing status and your "exemption allowances" or "exemption from withholding." (We'll cover "exemption from withholding" in a future article.) Although your filing status is a fairly straightforward variable, exemption allowances are a different matter.

Each exemption allowance is the value of each "personal and dependent exemption" allowed on your tax return (up from $3,300 for 2006 to $3,400 in 2007)—one allowance for yourself, one for your spouse, and one for each dependent on your return. As a practical matter, each exemption claimed results in an annual tax reduction (and withholding reduction) of $850 for someone in the 25% tax bracket (most travelers). Therefore, the relationship between exemptions and tax is inverse—more exemptions equals less tax and therefore less tax withheld.

Adjusting withholding

Making changes to your W-4 exemptions to adjust your tax withholding is often a "try it and check the result" exercise. It's best to adjust one exemption at a time. Don't forget to check after your next paycheck and adjust again if necessary. If you have trouble with under-withholding, many professionals recommend you just add the desired amount in box 6 of the W-4, "Additional amount, if any, you want withheld from each paycheck," rather than using exemptions. But if you do so, be sure to still check the result.

The preceding discussion is general in nature, and should not be considered advice for any individual tax situation. You should consult with your personal tax planning professional for specific guidance relating to your unique circumstances.

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