Reduce withholding following layoff notice?

Question

x-no-archive: yesI just received a layoff notice from my employer.  My termination iseffective in one month, and I expect to receive a few weeks severancepay.  My expectation is that I will not find employment before myseverance runs out, so I am trying to fortify my ability to shelterand feed my family until full time work can be found.Among so many other things, I thought of reducing my W4 withholding.I am certain my IRS burden will be less in 2009, and I really need thecash now.  Am I being too clever?Thanks in advance.

Paul Thomas, CPA · Accepted Answer

"Plunker"  wroteYa do what ya gotta do.Just have enough withheld to cover the known income, and when your income increases later, make sure you pay in from that income as well.I'd run a quickie return based on the known income for your 2009.  Use that number as a target for withholding / estimated numbers.  Remember that unemployment is taxable - currently anyhow - so account for that as well.

ed · Answer

On the basis that what you make before termination plus unemployment and income from savings for the rest of hte year will be less than your Standard Deduction and Personal Exemptions, you can honestly reduce your withholding to zero--until you are reemployed.

ed

Plunker · Answer

x-no-archive: yes

Thank you very much for the responses. I took a look at this with my employer and found the following restrictions to claim exemption from withholding:

I claim exemption from withholding and I certify that I meet BOTH of the following conditions for exemption:

1) Last year I had a right to a refund of ALL Federal income tax withheld because I had NO tax liability;

AND

2) This year I expect a refund of ALL Federal income tax withheld because I expect to have NO tax liability

The first statement is not true, so I am told I can not claim exemption from withholding. Having been told that, my current allowances are set to 7 (married, family) which has permitted my to owe only very little extra over what was withheld during the year. Can I set this to a higher number of exemptions and have less withheld? Is there a maximum number?

Phil Marti · Answer

Correct.In order, yes and no.

way222 · Answer

I once found myself in a situation where I had already paid all the tax I would owe by October 1 or so. So I calculated how many exemptions I needed to claim to have zero withholding the rest of the year, and it was something like 20.

Employer didn't bat an eye, IRS didn't bat an eye, I got my money, everyone was happy.

Plunker · Answer

x-no-archive: yesApologies for needing the hand holding here, but how does onemake that calculation?  How many exemptions is enough?

Phil Marti · Answer

Ask your payroll office. If they can't tell you, check the withholding instructions in IRS Publication 15 and you can figure it out from there.

Before you adjust, make sure you've considered any severance you might get. If it's paid through the payroll system it will also be affected. Also find out whether you need to do something regarding state withholding.

Reduce withholding following layoff notice?

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