Things to Keep In Mind
As an employer, when I do receive those W-4 forms that show a low number of exemptions claimed (say zero) and I know the employee is married and has 4 dependents, I often ask, why are you claiming zero exemptions? Of course their answer is, “So the IRS will give me a great, big, fat refund at tax time!"
Let’s think about this honestly. The lower number you insert on your W-4, the more federal taxes will be taken out (some states also utilize what you fill out on your W-4 to determine state taxes withheld). If you’re making a salary of around $40,000 per year and have 3 dependents and you claim zero, you’ll have a load of federal, and maybe state taxes taken out of each paycheck and yes you will most likely get all that back when April 15th rolls around.
On the other side of that coin, what if you opened up a savings account that offered interest on top of what you put in the savings account? You would be gaining interest on money you are having withheld from your paycheck and Uncle Sam does not pay you interest, so what you put in, you’ll get back—without interest.
While this may take some planning on your part to ensure you put money into your savings account, earning interest is better than just using Uncle Sam as a no-interest savings account every year. Some companies that utilize direct deposit for employee paychecks will even allow you to deposit a certain amount into checking and a certain amount into savings—so ask if your company offers this feature.
In the end, it’s best not to use the IRS as a no-interest savings account. On the other hand if you have many dependents, you may want to take all the exemptions you can, however, beware, if you don’t plan to itemize, skip the exemptions that require itemization on your annual tax return and leave them at zero.
When considering how many exemptions should I claim on a W-4 form, the higher amount of dependents or exemptions, the less federal tax withheld and the lower the dependents or exemptions the higher the federal (or state) tax withheld.
Finally, you can always request to change your W-4 form if you feel you've calculated your exemptions incorrectly; just ask your personnel department.