Great question!
You have hit on a common point of confusion with the new W-4 form! The way dependents and other adjustments are handled is quite different than the old "allowances" system.
Entering $2,000 in the dependent section of your W-4:
- It means LESS taxes will be withheld per paycheck.
Let me explain why:
The W-4 Form
The current W-4 form (revised in 2020) no longer uses "allowances." Instead, it aims to be more direct about how your tax situation (filing status, multiple jobs, dependents, other income/deductions) impacts your withholding.
- Step 1: Personal Information (Name, SSN, Filing Status).
- Step 2: Multiple Jobs or Spouse Works (Crucial for avoiding under-withholding if you have more than one job or a working spouse).
- Step 3: Claim Dependents and Other Credits.
- Step 4: Other Adjustments (Other income, deductions, extra withholding).
- Step 5: Sign.
Understanding Step 3: Claiming Dependents and Other Credits
When you enter an amount in Step 3, you are essentially telling your employer: "I expect to receive X amount in tax credits (like the Child Tax Credit or Credit for Other Dependents) when I file my tax return. Please reduce my withholding by this amount throughout the year."
- Child Tax Credit: For each qualifying child under age 17, you can claim up to $2,000.
- Credit for Other Dependents: For other qualifying dependents (like an older child, parent, etc.), you can claim up to $500.
Why $2,000 in Step 3 means less withholding:
Tax credits directly reduce your tax bill, dollar-for-dollar. By putting $2,000 in Step 3, your employer's payroll system will calculate that you will owe $2,000 less in federal income tax for the year. To account for this, they will withhold $2,000 less from your total annual pay, spreading that reduction across your paychecks.
Example:
If your estimated annual tax liability was $7,681 (from our previous calculation) and you enter $2,000 in Step 3, your employer will aim to withhold only $5,681 ($7,681 - $2,000) from your paychecks over the year. This means more money in each paycheck for you.
Since your goal is to prevent owing taxes at the end of the year, you need to be careful with Step 3, especially if you have other income sources or if your income is close to the phase-out limits for these credits.
Please feel free to reach backout with any additional questions or concerns you might have!
Thanks for your questions today, and please have an amazing rest of your day!
Terri Lynn
