Is it okay to claim 10 allowances on my W4 in order to minimize fed withholding from paycheck and reduce huge fed refund expected?

[TomYoung · Accepted solution]

You adjust your W-4 according to how you see your income taxes playing out in the coming year.  How you do this depends largely on your own theory of the "ideal" result and the amount of risk you're willing to take.

At one extreme you set your allowances, (generally, increase them), to the point that the resulting withholding just barely gets you inside one of the 'safe harbors" to avoid being "underpaid" and being charged "underpayment" penalties.  You write a large check to the government on April 15th for the taxes you owe and congratulate yourself for not making an interest-free loan to the US Government.

At the other extreme you set your allowances, (generally, decrease them), to the point that the resulting withholding wildly exceeds the amount of taxes that you actually owe when you prepare your income tax return, resulting in a large refund which you receive several weeks after sending your income tax return to the IRS.  You revel in your "windfall" and completely ignore the fact that you made a large interest-free loan to the US Government.

Somewhere in the middle you set your allowances so that the resulting withholding ends up being fairly close to your income tax liability when you finish preparing your income tax return, resulting in a reasonable amount of refund or tax due. 

You can play around over here

https://turbotax.intuit.com/tax-tools/calculators/w4/

and make your own choice.  

Tom Young

[bo2]

Thank you for taking the time to answer my question.  I guess this leads to another question.  Let me tell you the scenario I am in.  I installed Solar this year.  I am expecting credit from Fed that totals $15k+.  My tax liability will be around 8k.  YTD 2500 has been withheld from my pay.  I want to stop the withholdings from my pay so I receive a smaller refund check.  I thought the only way to do this would be to change my allowances on my W4 to 10.  After reading your answer, now I am wondering if I will owe a penalty for not having enough withheld to cover liability or because I won't have to send a check, I won't be penalized?  I just don't want a loophole of the feds saying, well, even though you have a credit, you still didn't have enough withheld to cover current liability so we are slapping you with penalties.