It's frustrating to face penalties every year! The good news is that with a bit of adjustment on the W4, you can avoid owing the IRS money and those penalties.
"Allowances" are no longer used on the current W-4 form (redesigned in 2020). The new W-4 uses direct inputs related to your filing status, dependents, and other income/adjustments.
Use the IRS Tax Withholding Estimator: www.irs.gov/W4App
This is the most accurate and reliable tool available. It's designed specifically for situations like yours where both spouses work and have dependents. The estimator will walk you through questions about both of your incomes, your filing status, your child, and any other relevant financial details. It will then provide you with specific instructions on how each of you should fill out a new Form W-4. TurboTax also has a W4 calculator.
Step 1: Personal Information
- You both select "Married Filing Jointly."
Step 2: Multiple Jobs or Spouse Works
- If you or your spouse have another job, complete Steps 3 through 4(b) on only one Form W-4.
- Your withholding will be most accurate if you do this on the Form W-4 for the highest paying job.
Step 3: Claim Dependents
- Since you have a 1-year-old, you likely qualify for the Child Tax Credit.
- If your combined income is below certain thresholds ($400,000 for Married Filing Jointly for the full credit), you will enter $2,000 for your qualifying child here.
- Important: Only one spouse should claim the child tax credit amount on their W-4 (usually the higher-income earner, but the estimator will clarify). If both claim it, too little will be withheld.
Step 4: Other Adjustments Complete this optional step to make other adjustments.
- Other income (not from jobs).
- Deductions (other than the standard deduction).
- Any additional amounts you want to withhold from each check
For more info about w4, please look into https://turbotax.intuit.com/tax-tips/irs-tax-forms/how-to-estimate-federal-withholding/L99CO0yTK
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