How Many Tax Exemptions Should You Claim in 2021?
The number of allowances you claim determines the amount of tax withheld from your paycheck and ultimately impacts your take-home each pay period. It's important to find the right amount of allowances. Too many allowances can reduce your tax withheld and you might end up owing money to the IRS and have to pay an underpayment penalty. If you don't claim enough tax allowances, you will have to claim the money back as a tax return. How many tax exemptions should you claim in 2021?
A W-4 form, formally titled the “Employee’s Withholding Certificate,” is an IRS form that helps employers assess how much tax to withhold for their employees. Based on your filing status, dependents, anticipated tax credits, and deductions, this form helps your employer estimate your tax withholdings. A new W-4 needs to be filed whenever you change a job.
There was a substantial change in the W-4 form and withholdings.
The W-4 has undergone a substantial change lately. Prior to 2020, employees could claim allowances on their W-4 to lower the tax withheld. However, the 2017 Tax Cuts and Jobs Act overhauled a lot of tax rules, which did away with personal exemptions. This change is a good reason to revise your W-4 based on your recent tax returns. If there has been a big personal life change like marriage or divorce, the birth of a child, or a new side job, it might also be a good idea to update your W-4.
The new W-4 (effective since December 2020) still requires basic personal information but doesn't ask for a number of allowances or personal exemptions. Employees who want to lower their tax withholding can still claim dependents. You can still increase or decrease your withholding amount based on factors like a second job or your eligibility for itemized deductions.
How can you use 4(a), 4(b), and 4(c) for withholding tax?
You can estimate your income from other sources like a second job, capital gains, and interest on investments by updating line 4(a) of your W-4. If you plan to itemize deductions instead of claiming a standard deduction (because you believe it will cut your taxes more), you can estimate those extra deductions and change line 4(b) on Form W-4.
If you want a specific amount of extra money withheld from your paycheck, you can indicate that on line 4(c) of the form. These line items will make a change in the tax being withheld from your pay in each period.
How can I claim an exemption from withholding taxes?
You can also claim exemptions from withholding taxes if:
- You got a refund of all your federal income tax withheld last year because you had no tax liability
- You expect the same thing to happen this year
You will have to keep submitting a new W-4 each year to keep claiming an exemption from withholding.
You should fill out W-4 as accurately as possible to avoid paying penalties while paying taxes and still keep as much as your earnings instead of loaning it to the government for a part of the year.