IRS W-4 calculator recommended allowences

The 7 is probably correct. This is a known anomaly that results from you starting your job mid-year. At the start of next year you'll need to drop back to 1 or 2. The deal is that the tables which tell your employer how much to withhold given the number of exemptions assume you're working a full year. But for this year, you didn't. So if you claim the typical 1-2 exemptions, you'll be massively overwithheld.

But again, you will need to switch to 1-2 at the start of next year. For a full year 7 will leave you massively underwithheld.

-- Rich Carreiro snipped-for-privacy@rlcarr.com

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OK. I haven't done an actual tax calculation to verify the results, but the results seem plausible FOR THE REMAINDER OF THIS YEAR ONLY. That is the important issue. The reason it only applies for this year is that you are starting your job at mid year. But the withholding tables implicitly assume that your income is earned at the current rate over the entire year. Since the tax rate structure is progressive (both in rates and because of standard deductions, personal exemptions, etc.), having only half the annual income will cause a tax bill that is less than half the full year tax bill. This is especially true at the lower end of the income scale. So, that is why -- for a half-year of income -- the calculator would recommend a higher number of withholding allowances than for a full year's income.

It may be worth also running the calculator based on a full year's income and seeing what the difference is. You would need to switch to that come January anyway.

This is a reasonable financial decision as far as it goes. The key question, though, is whether you would be able to absorb the increase in withholding when it strikes next January? At that point it is likely that you would have to substantially reduce the number of allowances, and then your income would suddenly shrink. Since I haven't run any numbers, I can't say if it would have to shrink by $600/month, but that is certainly possible. The problem is that expenses have this nasty habit of increasing to consume all available income, which is why having income reductions tend to hit really hard. That means that if you take the increased withholding allowances for this half year, you should put the $600/month into a savings account, so that you can start building up an emergency fund. You should not use it for the car payments, since they will continue past the end of the year -- at which point you will have to reduce allowances and increase withholding. If you feel you don't have the self-discipline to put that money away, you may be better off taking the large refund for the first year and using that to either fund an IRA or establish an emergency savings fund.

The normal withholding tables are based on you earning the same amount every period. Since you're working for only half the year, that means they withhold at a higher bracket than you'll actually be in.

Due to withholding at the higher bracket you aren't in. That seems reasonable (though I didn't check the arithmetic).

Again, without checking the arithmetic, that seems reasonable.

That will be true next year, when you work for the full year. Seth

I thought so too, but not exactly: 1-2 will be the correct withholding. 7 will leave him underwithheld, but with no penalty (because he'll have paid more withholding than his total tax bill for this year). So if he's disciplined enough to stick the extra money in the bank, he's better off not amending his W-4 until the following year. Seth