CALCULATE: How Allowances Affect Your Taxes
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by Megan Heine
| 6 Questions
Withheld allowances are “employee-claimed exemptions on the W-4 to determine how much of an employee's pay to subtract from his or her paycheck” (Investopedia). Here’s how it works:
1. On your W-4, you select the number of “allowances” you want, which determines how much is withheld (subtracted) from each paycheck.
2. You can select any number of allowances, but remember that your overall tax bill will NOT change.
3. This only determines how much of your tax bill is taken from each paycheck, and how much you owe at the end of the year (or receive back through a refund if you overpaid through your paycheck).
4. At the end of the year, the IRS determines whether you owe taxes or receive a refund based on how much was subtracted from each paycheck.
5. If you withheld more than enough, you’ll receive a refund
6. If you didn’t withhold enough, you’ll owe more taxes
Part I: Inputting Personal Information
To illustrate the effect allowances have, we are going to use the TurboTax W-4 Withholding Calculator. Go to the calculator and input the following personal information.

Once you’ve completed the calculator, you will get the “Results” page.
Part II: Experimenting with the number of Withholding Allowances
On the Results page, use the slider to adjust the number of withholding allowances to see how each paycheck would be affected, and whether you would owe taxes or receive a refund at the end of the year. Enter your withholding per paycheck, and your refund amount at the end of the year.
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1
Enter your withholding per paycheck, and your refund amount at the end of the year.
Part III: Withholding Allowance Reflection
Now that you’ve recorded the effect of different withholding allowances on your paycheck and potential refund, answer the following questions.
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Complete the following sentences:

“The ___________ (more/fewer) withholding allowances I take, the more money I will receive in each paycheck.”
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Complete the following sentences:

"The ___________ (more/fewer) withholding allowances I take, the greater the likelihood I will owe taxes when I file my return.
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In the chart, identify one Pro and one Con to getting more in your weekly paycheck versus getting a big refund at the end of the year.
The general rule of thumb is: you get one allowance for yourself, and one for each dependent (spouse, children and relatives who rely on you for financial support).
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Based on the rule of thumb, how many allowances would this person claim? Why? (for the example that you did the W-4)
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If you were this person, how many allowances would you claim? Why?