Tax Tips & Calculators

Form W-4 is the form you file with your employer to show:

• If you're married or single
• How many withholding allowances you should claim. The more allowances you claim, the less tax is withheld.

Since your circumstances might change from year to year, review your withholding allowances each year. In 2011, each allowance you claim reduces your taxable income by $3,700. If you claim more allowances than you have a reasonable basis for, the IRS can penalize you.

If you received a large refund, consider increasing the number of allowances you claim so less tax is withheld. If you paid the IRS a large sum when you filed your return, decrease the number of allowances you claim.

If you don't file Form W-4, your employer must withhold tax from your wages at the highest rate - as though you're single with 0 allowances.

After claiming the allowances for yourself and your dependents, you can add extra allowances if:

• You're single and have only 1 job.
• You're married, have only 1 job, and your spouse doesn't work.
• Your wages from a second job or your spouse's wages are $1,000 or less.
• You have at least $1,500 of child- or dependent-care expenses and will claim a tax credit for these costs.
• You'll file your return as a head of household.
• You'll claim child credits – which are worth $1,000 for each eligible child. The number of allowances you claim depends upon the number of eligible children and your income.

Other life changes that might determine your Form W-4 allowances include:

• Marriage or divorce
• Birth or adoption of a child
• Purchase of a new home
• Retirement
• New job or second job
• Increase in interest, dividend, or self-employment income
• Increase in your itemized deductions

Exemption From Withholding

You must have withholding if any of these apply:

• Your income for 2011 is more than $950.
• Another person can claim you as a dependent on his or her return.
• You have more than $300 of unearned income. Unearned income includes interest on savings accounts and mutual fund dividends.

If you can't be claimed as a dependent, you can make much more and still be exempt from withholding.

If you owed no federal tax last year and expect to owe none this year, you might be exempt from withholding. For 2011, a single person who isn't a dependent can have as much as $9,500 in gross income before any tax is due.

If you earn $200 a week or more and claim the exemption from withholding on your W-4, your employer might be asked to send the form to the IRS. If the IRS questions the number of exemptions you claim, you'll be asked to justify your claim.

Working Couples and Withholding

If both you and your spouse are employed, figure the total allowances you're both entitled to and divide those total allowances between you and your spouse. The W-4 has a special worksheet for 2-earner couples. It helps you and your spouse figure the number of allowances you should each claim based on each income.

Withholding and Retirement Income

You can choose to have federal income taxes withheld from your:

• Pension
• Annuity
• Traditional IRA withdrawals
• Social Security benefits

With other retirement plans, you might need to file a form with the payer to stop required withholding. If you don't complete withholding forms for pension benefits, taxes will be withheld as though you were married and claiming 3 exemptions. So, taxes will only be withheld if your pension is at least $2,080) per month.

You should re-evaluate each year to see if you want to have taxes withheld. Use Form W-4P to have taxes withheld from your pension, annuities, and IRAs. Use Form W-4V:

Voluntary Withholding Request to have taxes withheld from Social Security. Choose 1 of these rates for Social-Security withholding:

• 7%
• 10%
• 15%
• 25%

To learn more,see IRS Publication 505

Lump-Sum Pension Payout

If you receive a lump-sum payment from your retirement plan, the plan administrator is required to withhold 10% for federal income taxes.

If you plan to roll the money over into an IRA or another tax-free pension plan yourself, the tax withholding requirement is 20%. This applies even if you retire, quit, or are laid off. If 20% is withheld, you'd be prepaying tax you might not owe – especially if you roll over the distribution within 60 days.

So, if you handle the rollover yourself by taking the check and depositing it in a rollover IRA within 60 days:

• Your plan administrator will withhold 20% of your distribution.
• Unless you include the amount equal to the 20% withholding from another source, you won't have enough to put the full payment into an IRA.
• The IRS will tax and possibly penalize any part of the gross distribution that's not rolled into an IRA within 60 days.

To avoid having 20% withheld from your distribution, you should do a direct rollover. To do a direct rollover:

1. Tell your employer you want to roll the funds over directly to another plan or IRA.
2. Provide your employer with the information about the account that's to receive the rollover funds.
3. Your employer will transfer the funds directly to the other account without withholding any taxes.

If done this way, the transaction will be tax-free to you.

Tips and Withholding

All tips you receive are taxable income subject to withholding. If you receive $20 or more per month in tips, report that income to your employer.

Tip income you report will show up on Form W-2, box 7 (Social Security tips) and box 1 (Wages). To learn more ,see the Tip Income tax tip.