Just completed 2007 return; Big refund. How do I adjust my W-4 so I can break even?

Question

Currently I claim 1 on my W-4.  My wife and I file jointly and we have 2 kids with another on the way.  My income for 2007 was $66,000.  My wife made $18k from regular job plus she sells Mary Kay which showed a net loss of $9000 last year. No taxes were taken out of her pay from her regular job.  Total income approximately $75,800 for 2007.  Our return for 2007 was over $5100.

For 2008, my income will be $72,000.  My wife will earn about $18k but taxes are taken out this year and she claims zero on her W-4.  I'll assume her Mary Kay business will show a loss of about $4000 for 2008.

We do have a house and a mortgage.  I'd like to adjust my W-4 so we break even in 2008 (or close to it).  With a baby coming, I rather have the money to spend now.  Just based on my salary, I would like to see an extra $200 per paycheck  (adjusted for the remainder of the year $4000).  

Any help is appreciated.

Bostonian In MO · Accepted Answer

A fast and dirty rule of thumb is to increase the withholding allowances on the job with the higher income by 1 for each $500 that you receive in refunds this year.  

In your case you'll need to adjust that a bit for the change in your wife's income and the new baby on the way.  Start with 10 for the $5,100 refund.  Now consider the smaller loss from your wife's self-employment.  Give back 2 for that just to be safe.  Now you're at 8.  Now take 1 for the child on the way for 9 and add 2 more for the Child Tax Credit for that child, giving you 11.  That's what you should change your withholding allowances to on your W-4 at your work.

I know that this sounds like a big number but if your take-home pay goes up by $100 per week you'll KNOW that you'll be just about even at filing time as long as your income stays within the limits you've outlined here.  If claiming 11 makes you nervous, cut it down to 9 or 10 if you want but given the numbers you have you would be safe with 11 as I've already built in the 1 you're currently claiming as a small safety net.

Note to the MBA:  The Child Tax Credit does NOT stop at 2 children.  You're confusing it with the EIC I believe but there's no limit on the number of children you can claim the CTC for as long as they are all under age 17 at the end of the tax year.

Randall Parker, MBA · Answer

Based on your wife's income, she should claim 4 exemptions.  She still won't have any withholding.

Based on your income, you should claim 3 exemptions, just to ensure that you don't end-up paying in the end.

There is no problem with owing money on April 15, as long as your withholding equals 90% of the tax you owed for the prior year, and you have the cash to pay on time.

Without knowing more details on your income and deductions, that's as close as I can recommend.  If you used TurboTax to prepare your return, it has a utility that will compute W-4 forms for you, based on your tax return and anticipated changes to income.

With the baby, you will gain another exemption.  Your child tax credit won't change, since you already have two kids.  

You might want to reexamine the Mary Kay business to ensure that it won't be seen as an entity that does not have the goal of being profitable.  Many people in direct selling or MLM businesses claim losses year-after-year.  Ensure that a profit motive, and the effort required to turn a profit, exists for this business.

It's always a good idea to show profit 3/5 years, if possible.  If you lose money in it every year, it could pose an audit trigger in the future.

You might also consider IRA accounts for yourself and your wife, as well as starting some sort of education plan for each of your kids.  College will come sooner than you think!

Good luck, and happy filing!


P.S.  Just for the sake of others that might be wondering how many exemptions to take.  A lot of people don't realize that if you take 10 exemptions on your W-4 that your employer automatically is required to forward your W-4 to the IRS for approval.  If you take 9 or less, this is usually not an issue.

zl3est · Answer

The more depends you claim the less taxes that will be taken out. With a wife and 2 kids plus one on the way I would claim 5 dependents, why let the goverment take more of your money than they should. They don't give you interest on it.

Dyan O · Answer

If your wife has been selling MK for a while,she can only claim a loss for so many years or it's concidered a hobby. I would add 2 more on to your W-4. So if you claim 3 now, make it 5. Make sure that you claim yourself, your wife and one deduction for every child you have. Also check out these. 

http://www.kiplinger.com/basics/managing/taxes/wp_withholding.html

http://turbotax.intuit.com/tax-tools/estimating_your_take-home_pay_form_w-4/article

r_kav · Answer

Look at your total tax liability on your 2007 return and adjust your witholding (you and your wife) so that it will equal that, at 2008 year end. You can adjust it multiple times, until it comes out right.

Crazeddoglady · Answer

I think the best you can do is claim 0 on your w-4 but you might want to check with a tax professional for sure.

Richard M · Answer

Go to the W4 calculator below, enter your data, and it will compute your allowances for you:

http://www.paycheckcity.com/w4/w4instruction.asp

Just completed 2007 return; Big refund. How do I adjust my W-4 so I can break even?

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