How Much is Each Exemption Worth?
 

Some background.

I'm a GS-12 engineer with the government. My wife is a LT Nurse with the Navy. She is getting out in June and going to be a stay-at-home mother. We're going down to one income.

I went to the IRS calculator, and based on roughly the same amount of itemized deductions that I had for 2007, we would get back about $2,900 for 2008. I want that money in our pockets to save.

http://www.irs.gov/individuals/artic...=96196,00.html

So this website says to change my exemptions from Married and 0 exemptions to 8 exemptions. I thought that in order to have exemptions, you had to have a social security number? Can someone shed some light on this?

Also, how much is each exemption worth in my paycheck?

If you want to claim 8 exemptions all you have to do is put that number on the W-4 form, additional SSNs not needed.

Be aware that if you wind up owing taxes at the end of the year, there can be a penalty in some cases even if you pay the full amount due with your return.

I think the limit is $750, and that number is coming from a coworker whose wife is a CPA. In other words, if I claim 8 exemptions, and end up owing more than $750 in taxes at the end of the year, then I might get audited or I might incur a penalty.

An exception is roughly $500.
You can change your W4 anytime you want, however, and it should take effect immediately.

So change your W4, take a look at how much the taxes changed on your next paycheck.
Technically you want taxes to go down by 2900/12 = $241 per month.
If you want to fix up next year's refund, you could adjust it so you get back 2900/8 = $362
a month, but remember to change the W4 again in december or you will owe next year.

Also remember: You are allowed to have a different W4 number for federal, and state.
My state is at 0, my fed is at 2.

- Frank

Frank, thanks man. The exception has to be during tax time, and not during the year for that $500 for every exception. In other words, If I claim 8 exemptions, $500*8 = $4,000. I'm not going to get that every paycheck. Are you saying that it's $500 per exemption per year? So from here on out until December, $500 * 8 exemptions = $4,000 / 19 paychecks left for the year (for me) = $210.53 extra per paycheck?

You can change your W4 whenever you want, and it takes effect immediately.
(well, technically, at your next paycheck). You can do it change it tomorrow, if you want.

Any time something happens where your taxes are changed signifigantly, like buying a house, or you sell stock options, or whatever, you should IMMEDIATELY change your W4 to avoid a huge imbalance next april.


$500 per exception per year.

It's not $210 - The exemptions don' t try to play 'catchup'.
If you set your exemptions to 8 on December 30, it's not suddenly going to
add $4000 to your next paycheck.

If you have 19 paychecks left, you get something like 26 paychecks a year. (??)
So if you bump up your exemptions from X to X+8, your next paycheck
will be roughly (500 * 8 ) / 26 = $153 higher.

So if you want next year's taxes to be 'even steven', you need to bump your
exemptions to roughly 11 for 9 months. ( 500 * 11 ) / 26 = $211
$211 extra per paycheck * 19 paychecks = roughly $4000.

And then you need to dial it back down to 8 on 1/1, or else you are going to have a nice payment of: (211 * 26) - $4000 = $1486 to make the next year.

I'd probably just bump it up by 8, and leave it. BTW, This of course assumes that whatever is causing your taxes to be off is a regular event.

- Frank

Frank, thanks. That makes a lot more sense now.

My wife is in the military (Navy nurse to be exact), and on June 1st, she will stop working and be a stay-at-home mom for the rest of the year, and probably permanently. She MIGHT do part-time nursing (weekends here and there), but nothing substantial on a regular basis.

I'm assuming that she won't work at all for the rest of the year. If she does, come October or so, I may have to decrease the amount of exemptions to cover those taxes.

I went onto the IRS website, and it said to increase the exemptions from 0 to 8. At that point, I would get back $25, according to the IRS website. Why is that different from what you're saying, in that I should increase it to 11 exemptions?

Also, unfortunately, I can't change the exemptions to more than 10 online. I would have to do it through paper means, and I don't want to do that.

Also, this has nothing to do with the exemptions at the end of the year when I have to put down a SSN right? It's just to get more money for my paycheck?

Finally, yes I do get 26 paychecks a year (every two weeks). I have 19 left, including getting paid this coming Friday. Wouldn't the amount of money I get be $500*8/19 (instead of 26) = $210.53/paycheck (since I made this change yesterday on April 14th)?

Besides people, do you have any other items that you will be itemizing such as mortgage interest and property taxes?

Yes. I'm assuming that the mortgage interest will go down by about $20 over the year, and that property taxes will stay about the same.

I'm also assuming that in Florida we can deduct general sales taxes (no income tax), and that our charitable contributions will be about the same.

I'm assuming that my student loan interest will actually increase because this year it was clipped because we made too much darn money. Same thing with the child tax credit. Our credit for 2007 was only $800, and I expect it to go back to $1000 for 2008, plus we have child care expenses of $135/week for about 8 weeks. Overall, our itemized expenses were $18,740 last year, and I expect it to be within +/-$500 next year.

Because the IRS is using a 'long term' number.

If you change it to 8 now, next April you will still get a refund, because you started late.
However, every year after that will be correct, because you were '8' for the entire year.


Then leave it at 10. It's only a $19/paycheck difference. See below.


I have no idea what you are talking about here, sorry, but changing W4 is just for getting more/less money from your paycheck.

No. If you get 26 paychecks a year, each W4 exemption is roughly 500/26 = $19 dollars per paycheck.
It makes no difference what day you make this change on.

For some reason, I'm only getting $134.XX more on my paycheck from federal taxes. I worked some overtime, but the federal taxes taken out was only $134.XX less. What's going on?

What did you change it to? 10?

I picked hard numbers to make it clear, but the $500/year/exemption is still an estimate. It may be more or less depending on current income, or current exemptions, or whatever. Who knows how the IRS works. The behavior will be the same though - if it's taking out $134 with exceptions set to X, then that's what it'll take out for every paycheck afterwards.

That's why I suggested changing it, seeing what the exact paycheck difference was, and then adjust again if you want.

- Frank

But if you max out your expemptions on your W4, don't you still even out when you file taxes?

I changed it to 8 from 0. I guess each exemption is worth less than $500.

Summary of Changes in Deductions
Type Previous Pay Period Current Pay Period Difference
MEDICARE 38.72 41.30 2.58
OASDI 165.56 176.62 11.06
TAX, FEDERAL 300.47 165.68 -134.79


Above shows that my federal taxes are $134.79 less than my last paycheck with married and 0 exemptions. So that means that $134.79 * 26 paychecks per year / 8 exemptions = $438.07 is what each exemption is worth.

I don't actually know if there is a maximum excemption amount.
You could in theory set it ultra high, pay zero every month, and then have a huge hit in April.

However, if you owe too much (I forget the amount), you get fined (10%?).

Not to mention doing wacky things on your tax forms is a nice way to get yourself audited. Definitely not worth it.

- Frank

My question is: The IRS website took into account how often I get paid, how often my wife gets paid, when she will stop working, and how many paychecks I have left for the year. Yet they only said to do 8 exemptions. It said I would get back about $25 for 2008 taxes. How does the IRS determine exemption amount for the year?

My question is do you really have 8 exemtions or are you just trying to max your biweekly paycheck?

No I don't have 8 kids. I have one child. But according to the IRS website (with a link that is in this thread), I should increase from 0 exemptions to 8 exemptions. I still want taxes to be taken out, because I don't want a large refund.

When I first had my mortgage, and a car loan via a home equity loan, I had my exemptions cranked up to 6. As time passed, and things got paid off, it dropped back to normal levels.

Well, I'm screwed this year. Because I let this lapse (did not adjust withholdings from 8), I owe a shitload to the IRS. :annoyed:

I don't understand WTF happened.

Wife went back to work?

:nod:

I just forgot that I had eight exemptions posted. Oh well. Live and learn.

I may take my taxes to a professional this year, as I want to see if there are any other legal ways to reduce my tax burden this coming April.

I'm ressurecting my old thread.

I once again went to the IRS website withholding calculator, and it said I should increase my allowances from 9 to 18. This is based on my wife only making ~$4,707 (she quit her job). The problem is, once again, that I have to submit a W-4 to my payroll office.

I go to the IRS website, dowload the W-4, and it calculates that I should only get 13 allowances (1 for myself, 1 because my wife does not work any more and I'm married, 1 for my spouse, 2 for our two children, 1 because I have at least $1,900 in child care expenses (actually close to $7,990 in child care expenses), 4 for child tax credit (2 credits for each of two kids), and based on itemized deductions, I can only claim an additional 3 more for a total of 13). How the hell does the IRS website calculate that I can take out 18 allowances but the freakin' W-4 says otherwise?! :rant: