Adjusting W-4 can boost your take-home pay

What is the maximum number of dependents I can claim during the year?   I understand that all I can claim at the end of the year is my wife and two children, but could I declare 10 dependents during the year and settle up with the IRS at the end of the year?  Reason: Need to increase the amount of money in my take home pay. T.C. via e-mail

You are required to pay taxes on your income throughout the year. There was a time (up until World War II) when taxpayers just paid their taxes once a year, in the spring. In order to build up the federal coffers to fund the country's involvement in the war, the pay-as-you-go system of withholding was developed.  

In July 1943, the first withholding tax occurred. As soon as World War II ended, the government realized how much easier it would be to continue to collect taxes if the withholding program remained in place, and so, rather than go back to the lower peacetime tax rates and a system of paying tax once a year with the tax return, our elected officials began dreaming up new ways to spend the money they were extracting from pay checks, and the withholding system became permanent.   

Changing your withholding allowances so that you have more disposable income during the year is certainly one way to increase your take-home pay. If you consistently receive a refund when you file your tax return each spring, then you probably are having too much tax withheld, and it makes a lot of sense to increase the number of exemptions you claim and reduce your withholding.   

On the other hand, if increasing your withholding allowances will set you up for a large tax payment that you owe in the spring, you're looking at a pretty high-priced loan, and with interest rates as low as they are right now, a bank or an advance from your employer might be a better way to borrow money.   

Here's the way the withholding system works. When you take a job, you are required to fill out a W-4 form, called the Employee's Withholding Allowance Certificate. You'll fill out a similar form for your state income tax withholding. On the W-4 form you list the number of withholding allowances you think you are entitled to claim. The more allowances you claim, the lower your withholding and the higher your take-home pay.   

Typically, taxpayers claim one allowance for themselves, one for their spouse, and one for each child in the family who is claimed as a dependent on the parent's tax return.   

In addition to the people-related allowances, the IRS suggests the following withholding allowances if any of these situations apply to you:

• One allowance if you are married and your spouse works

• One allowance if you qualify as a head of household (usually this applies to single parents)

• One allowance if you plan to claim a tax credit for child care expenses that toal at least $1,500

• Additional allowances if you qualify for the child tax credit - the number of recommended allowances depends on your income level and the number of children in your family .

• Additional allowances if you plan to itemize deductions - the number of allowances depends on the amount of itemized deductions you expect to claim .

As you can see, there is some flexibility in the number of withholding allowances you can claim. Be aware that your employer is required to send a copy of your W-4 form to the IRS if you claim more than 10 withholding allowances.   

If your withholding is too high, or too low, and you want to make an adjustment, you can file a new W-4 form with your employer at any time. Your employer will have 30 days in which to make the change in your withholding.   

If you claim so many withholding allowances that you end up owing taxes in the spring, you may be subject to penalties and interest on unpaid taxes. The IRS expects you to owe no more than $1,000 on your tax return. Owe more than $1,000 and penalty and interest charges apply. These charges are much higher than any conventional loan.