Financial Planning for Generation X & Y Women
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Expert Q&A Archive

How do I know how many deductions to make on my W-4 form at work?
I have been struggling with my W-4. I have recently been told by H & R Block in November when I was trying to get a loan from them that I would probably owe $2000 if I didn’t start deducting the taxes out of my pay. I haven’t changed the W-4 since I started working here on the reservation. I was claiming 7 on my deductions so I was getting most of my earnings. Now that I changed it they are taking out $400 and I can’t live on what I am getting after deductions. Please help me know what to do. Thank you
Dorothea Bernique:
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You did not specify what your deductions are currently; however, it sounds like you went from one extreme to the other. First of all a knowledgeable tax person or accountant should be able to assist you with determining what is best for you so that you are not taking these stabs in the dark. In the meantime, the changes that you make should be gradual and over a period of time so that you don't have the results that you are experiencing now.

I would suggest to you that you seek out expert tax counsel to make a final decision, but in the meantime you may want to take the middle ground and claim no more than 3 or 4 possibly. Remember, your goal is to try to break even or to owe very little. It does not benefit you to allow Uncle Sam to keep the money that you need for monthly provisions, just to get a huge tax refund at tax time.
Sharon P. Hardy, CFE:
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My personal recommendation to this person is to seek advice from a tax expert. I'm hopeful that there are such experts who do this for little or no cost to people who cannot afford to pay a lot for such a service.
Bettye J. Banks:
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Taxes are a fact of life, sadly. Taxes on earned income affect most of us. You need to begin to re-adjust your spending based on your ordinary take-home income, less your reasonable deductions. Don't claim 7 deductions if you only have one. You pay sooner or later anyway, and you DON'T want to mess with the tax man! You mentioned working on a reservation. If you are a Native American, living and working on a reservation, you may have special considerations.

You could probably benefit from a financial wellness class or counseling session at a non-profit counseling agency near you. Contact the National Foundation for Credit Counseling toll-free at 800-288-CCCS (2227) for the member office closest to you. Most offer free or very low cost budgeting classes. This could help you get a handle on your money. It doesn't matter if you have credit cards or not. The budgeting sessions are also usually free or very low-cost.

Some offices offer on-line education programs for those who have Internet access.
Suzanne Kincaid:
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Ok, let's look at it this way.

If it is estimated you will owe $2,000 at tax time, dividing that by 12 months = $166.66 a month.
So you will need to put aside $166.66 a month to have the money available when it may be due.
If you owe a little more, it will be easier to pay it. If you owe a little less, that's a bonus!
You will have a little extra spending money. Best to put this money in an interest-bearing account, perhaps a money market fund. This way you will earn a little extra in interest as well.

To recap, you can go back to 7 deductions for greater take-home pay. Just be sure to save out $166.66 a month for your tax liability that may be due each year. You are still some money ahead this way. $400 - $166.66 = $233.34 ahead. Hopefully that will make it easier to meet your monthly obligations too. Best wishes!
Kris Freeberg:
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Need more info. Why did H&R advise to reduce the exemptions? (They're not deductions, BTW, they're exemptions. Deductions are taken elsewhere on the tax return, either [the] Standard [Deduction] or Itemized [Deductions] on Schedule A).

[Editor’s Note: You can find descriptions and a discussion of exemptions and deductions in Internal Revenue Service Publication 501 (Exemptions, Standard Deduction, and Filing Information) at]
Connie K. Marmet:
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When you have filed you 2008 income taxes, look at what you owed in total and divide by the number of paychecks you get each year--typically 24 if you get paid twice a month, 26 if you get paid every two weeks. As an example, if you owed $2400 for 2008 taxes and are paid twice a month, you would have an estimated tax liability of $200 per month in 2009.

Then think about whether any of the factors affecting your income will change--salary, number of dependents, deductions, etc. If you don't expect a change, then work with your employer's Human Resources Department to determine which number of dependents would approximate the monthly tax liability you calculated ($200 in the example above). Double-check this with your accountant as there are some rules about minimum withholdings.

To respond properly I would need more information. Is the person married or single? How many dependents? Are they working in some sort of tax-exempt profession (they allude to working on a reservation)? Sorry, but I can't advise based on lack of information.
Frank Wells:
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Please take a look at all of your expenses for the next 30 days. If $400 is affecting your ability to live on your income, you may need a budget. The budget will help you create a savings "bucket", which can make up the difference when expenses are above your income. The best way to know for sure is by knowing where all the money is going, both in and out of your hands. There is more detail about budgets and tracking your spending at

Martha Fortune O'Brien:
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If you can get your tax preparer to provide an estimate of your total tax liability for the year, you should be able to subtract the amounts you have already paid through withholding and divide the remainder by the number of pay periods remaining in the year. This is what the ideal amount of withholding is for you, unless something changes in your income or deductions. If you cannot live off your income after taxes, something is out of balance in your financial life. It could be that you are making payments on debt (money spent in the past) and have little for current living expenses. It could be that your current level of spending is too high. It could be that your income is too low. If you make changes quickly to either pay off debt, reduce spending, or increase income, you will correct the problem and learn from it. If you are not making enough money, can you get a 2nd job to supplement your income? Can you get a roommate to share living expenses? There are many creative ways of looking at your situation. It requires an openness on your part to making changes to correct this situation and learning from this to not to create another situation like this in the future.

[Editor’s Note: You may wish to read the information on “Free Tax Return Preparation For You by Volunteers” on the Internal Revenue Service’s Web site at,,id=107626,00.html.]
Kim Nourie, CFP, CPA:
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Without knowing your specific tax situation, it is not possible to give you a detailed answer; however, if you do not withhold a portion of your earnings from each paycheck and then owe taxes at the end of the year, you may be subject to interest and penalties on the taxes you owe. If proper withholding leaves you with too little income, you likely need to consider lowering your standard of living or increasing your income. Perhaps a second job could help supplement your income and allow you to withhold a realistic portion of your income to cover your taxes.

Good luck to you
Claudia James:
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Please keep these points in mind when you complete a W-4:
1. You are the only one who can actually decide how to complete the W-4 form; tax advisors may or may not be helpful in guiding you as you complete the form. It is not uncommon for IRS to send your employer a letter stating the maximum number of allowances you can claim.
2. Everyone is required to prepay 90% of their taxes. And taxpayers can be penalized $500.00 for lying on your W-4. The W-4 form includes a perjury statement which the taxpayer is required to sign. If a taxpayer tells their employer the information on their W-4 is false, the employer is required to reject it because it is considered invalid.
3. There is a second worksheet which may be beneficial for you to complete.
4. The tax tables changed in April resulting in less taxation for most taxpayers.