The amount of income tax your employer withholds from your regular pay depends on two things.

Form W-4 includes three types of information that your employer will use to figure your withholding.

When reading the following discussion, you may find it helpful to refer to the filled-in Form W-4 on pages 10 and 11.

Personal Allowances Worksheet

Use the Personal Allowances Worksheet on page 1 of Form W-4 to figure your withholding allowances for all of the following that apply.

• Exemptions.

• Only one job.

• Head of household status.

• Child and dependent care credit.

• Child tax credit.

Exemptions (worksheet lines A, C, and D).   You can claim one withholding allowance for each exemption you expect to claim on your tax return.

Self.   You can claim an allowance for your exemption on line A unless another person can claim an exemption for you on his or her tax return. If another person is entitled to claim an exemption for you, you cannot claim an allowance for your exemption even if the other person will not claim your exemption or the exemption will be reduced.

Spouse.   You can claim an allowance for your spouse's exemption on line C unless your spouse is claiming his or her own exemption or another person can claim an exemption for your spouse. Do not claim this allowance if you and your spouse expect to file separate returns.

Dependents.   You can claim one allowance on line D for each exemption you will claim for a dependent on your tax return.

Reduction of personal allowances. For 2006, your deduction for personal exemptions on your tax return is reduced if your adjusted gross income (AGI) is over the AGI shown below for your filing status.

Single	$150,500
Married filing jointly or qualifying widow(er)	$225,750
Married filing separately	$112,875
Head of household	$188,150

If you expect your AGI to be more than that amount, use Worksheet 1-1 to figure your reduced number of personal allowances on lines A, C, and D of the Personal Allowances Worksheet.

Worksheet 1-1. Personal Allowances Worksheet (Form W-4) Reduction of Personal Allowances

1.	Enter your expected AGI	1.
2.	Enter:
	$150,500 if single
	$225,750 if married filing jointly or qualifying widow(er)
	$112,875 if married filing separately
	$188,150 if head of household	2.
3.	Subtract line 2 from line 1	3.
4.	Divide line 3 by $125,000 ($62,500 if married filing separately). Enter the result as a decimal	4.	.
5.	Enter the total number of allowances on lines A, C, and D of the Personal Allowances Worksheet without regard to the phaseout rule	5.
6.	Multiply line 4 by line 5. If the result is not a whole number, increase it to the next higher whole number	6.
7.	Divide line 6 by 1.5	7.
8.	Subtract line 7 from line 5. The total of the numbers you enter on lines A, C, and D of the Personal Allowances Worksheet cannot be more than this amount	8.

Only one job (worksheet line B).   You can claim an additional withholding allowance if any of the following apply.

• You are single, and you have only one job at a time.

• You are married, you have only one job at a time, and your spouse does not work.

• Your wages from a second job or your spouse's wages (or the total of both) are $1,000 or less.

If you qualify for this allowance, enter “1” on line B of the worksheet.

Head of household (worksheet line E).   You can file as head of household if you are unmarried and pay more than half the cost of keeping up a home that was the main home for all year of your parent whom you can claim as a dependent or that you lived in for more than half the year with your qualifying child or any other person you can claim as a dependent. For more information, see Publication 501.

  If you expect to file as head of household on your 2006 tax return, enter “1” on line E of the worksheet.

Child and dependent care credit (worksheet line F).   Enter “1” on line F if you expect to claim a credit for at least $1,500 of qualifying child or dependent care expenses on your 2006 return. Generally, qualifying expenses are those you pay for the care of your qualifying child who is under age 13 or for your spouse or dependent who is not able to care for himself or herself so that you can work or look for work. For more information, get Publication 503.

  Instead of using line F, you can choose to take the credit into account on line 5 of the Deductions and Adjustments Worksheet, as explained later under Tax credits.

Child tax credit (worksheet line G).   If your total income will be less than $55,000 ($82,000 if married), enter “2” on line G for each eligible child.

  If your total income will be between $55,000 and $84,000 ($82,000 and $119,000 if married), enter “1” on line G for each eligible child plus “1” additional if you have four or more eligible children.

  An eligible child is any child:

• Who is your son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, or a descendant of any of them (for example, your grandchild),

• Who was under age 17 at the end of 2006,

• Who did not provide over half of his or her own support for 2006,

• Who lived with you for more than half of 2006, and

• Who was a U.S. citizen, U.S. national, or a resident of the United States.

  For more information about the child tax credit, see the instructions in your Form 1040 or Form 1040A tax package.

  Instead of using line G, you can choose to take the credit into account on line 5 of the Deductions and Adjustments Worksheet, as explained later under Tax credits.

Total personal allowances (worksheet line H).    Add lines A through G and enter the total on line H. If you do not use either of the worksheets on the back of Form W-4, enter the number from line H on line 5 of Form W-4.

Deductions and Adjustments Worksheet

Use this worksheet only if you plan to itemize your deductions, claim certain credits, or claim adjustments to your income and you want to reduce your withholding.

Use the amount of each item you can reasonably expect to show on your return. However, do not use more than:

1. The amount shown for that item on your 2005 return (or your 2004 return if you have not yet filed your 2005 return), plus

2. Any additional amount related to a transaction or occurrence (such as the signing of an agreement or the sale of property) that you can prove has happened or will happen during 2005 or 2006.

Do not include any amount shown on your last tax return that has been disallowed by the IRS.

Example.

On June 30, 2005, you bought your first home. On your 2005 tax return, you claimed itemized deductions of $6,600, the total mortgage interest and real estate tax you paid during the 6 months you owned your home. Based on your mortgage payment schedule and your real estate tax assessment, you can reasonably expect to claim deductions of $13,200 for those items on your 2006 return. You can use $13,200 to figure the number of your withholding allowances for itemized deductions.

Not itemizing deductions.   If you expect to claim the standard deduction on your tax return, skip lines 1 and 2, and enter “0” on line 3 of the worksheet.

Itemized deductions (worksheet line 1).   You can take the following deductions into account when figuring additional withholding allowances for 2006. You normally claim these deductions on Schedule A of Form 1040.

1. Medical and dental expenses that are more than 7.5% of your 2006 adjusted gross income (defined later).

2. State and local income taxes and property taxes.

3. Deductible home mortgage interest.

4. Investment interest up to net investment income.

5. Charitable contributions.

6. Casualty and theft losses that are more than 10% of your adjusted gross income.

7. Fully deductible miscellaneous itemized deductions, including:

   1. Impairment-related work expenses of persons with disabilities,

   2. Federal estate tax on income in respect of a decedent,

   3. Repayment of more than $3,000 of income held under a claim of right that you included in income in an earlier year because at the time you thought you had an unrestricted right to it,

   4. Unrecovered investments in an annuity contract under which payments have ceased because of the annuitant's death,

   5. Gambling losses up to the amount of gambling winnings reported on your return, and

   6. Casualty and theft losses from income-producing property.

8. Other miscellaneous itemized deductions that are more than 2% of your adjusted gross income, including:

   1. Unreimbursed employee business expenses, such as educational expenses, work clothes and uniforms, union dues and fees, and the cost of work-related small tools and supplies,

   2. Safe deposit box rental,

   3. Tax counsel and assistance, and

   4. Certain fees paid to an IRA trustee or custodian.

   Adjusted gross income for purposes of the worksheet is your estimated total income for 2006 minus any estimated adjustments to income (discussed later) that you include on line 4 of the worksheet.

  Enter your estimated total itemized deductions on line 1 of the worksheet.

  

Phaseout of itemized deductions. For 2006, your total itemized deductions may be phased out (reduced) if your adjusted gross income (AGI) is more than $150,500 ($75,250 if married filing separately). If you expect your AGI to be more than that amount, use Worksheet 1-2 to figure the amount to enter on line 1 of the Deductions and Adjustments Worksheet.

  

Worksheet 1-2. Deductions and Adjustments Worksheet (Form W-4)—Line 1 Phaseout of Itemized Deductions

1.	Enter the estimated total of your itemized deductions	1.
2.	Enter the amount included in line 1 for medical and dental expenses, investment interest, casualty or theft losses, and gambling losses	2.
3.	Subtract line 2 from line 1	3.
	Note. If line 3 is zero, stop here and enter line 1 of this worksheet on line 1 of the Deductions and Adjustments Worksheet.
4.	Multiply line 3 by 80% (.80)	4.
5.	Enter your expected AGI	5.
6.	Enter $150,500 ($75,250 if married filing separately)	6.
7.	Subtract line 6 from line 5	7.
8.	Multiply line 7 by 3% (.03)	8.
9.	Enter the smaller of line 4 or line 8	9.
10.	Divide line 9 by 3.0	10.
11.	Subtract line 10 from line 9	11.
12.	Subtract line 11 from line 1. Enter the result here and on line 1 of the Deductions and Adjustments Worksheet	12.

Adjustments to income (worksheet line 4).   You can take the following adjustments to income into account when figuring additional withholding allowances for 2006. These adjustments appear on page 1 of your Form 1040 or 1040A.

• Net losses from Schedules C, D, E, and F of Form 1040 and from Part II of Form 4797, line 18b.

• Net operating loss carryovers.

• Certain business expenses of reservists, performing artists, and fee-based government officials.

• Health savings account or medical savings account deduction.

• Certain moving expenses.

• Deduction for one-half of self-employment tax.

• Deduction for contributions to self-employed SEP, and qualified SIMPLE plans.

• Self-employed health insurance deduction.

• Penalty on early withdrawal of savings.

• Alimony paid.

• IRA deduction.

• Student loan interest deduction.

• Jury duty pay given to your employer.

• Reforestation amortization and expenses.

• Repayment of certain supplemental unemployment benefits.

• Attorney fees and court costs for certain unlawful discrimination claims.

Enter your estimated total adjustments to income on line 4 of the worksheet.

Tax credits (worksheet line 5).   Although you can take most tax credits into account when figuring withholding allowances, the Form W-4 worksheets use only the child and dependent care credit (line F of the Personal Allowances Worksheet) and the child tax credit (line G). But you can take these credits and others into account by adding an extra amount on line 5 of the Deductions and Adjustments Worksheet.

  If you take the child and dependent care credit into account on line 5, do not use line F of the Personal Allowances Worksheet. If you take the child tax credit into account on line 5, do not use line G.

  In addition to the child and dependent care credit and child tax credit, you can take into account the following credits.

• Foreign tax credit, except any credit that applies to wages not subject to U.S. income tax withholding because they are subject to income tax withholding by a foreign country. See Publication 514, Foreign Tax Credit for Individuals.

• Credit for the elderly or the disabled. See Publication 524, Credit for the Elderly or the Disabled.

• Hope credit. See Publication 970, Tax Benefits for Education.

• Lifetime learning credit. See Publication 970, Tax Benefits for Education.

• Retirement savings contributions credit. See Publication 590, Individual Retirement Arrangements.

• Adoption credit. See the instructions for Form 8839, Qualified Adoption Expenses.

• Mortgage interest credit. See Mortgage Interest Credit in Publication 530, Tax Information for First-Time Homeowners.

• Credit for prior year minimum tax if you paid alternative minimum tax in an earlier year. See the instructions for Form 8801, Credit for Prior Year Minimum Tax—Individuals, Estates, and Trusts.

• Qualified electric vehicle credit. See the instructions for Form 8834, Qualified Electric Vehicle Credit.

• General business credit. See Form 3800, General Business Credit.

• Earned income credit, unless you requested advance payment of the credit. See Publication 596, Earned Income Credit.

• Alternative motor vehicle credit. See Form 8910, Alternative Motor Vehicle Credit.

• Alternative fuel vehicle refueling property credit. See Form 8911, Alternative Fuel Vehicle Refueling Property Credit.

• Clean renewable energy bond credit. See Form 8912, Clean Renewable Energy Bond Credit and Gulf Bond Credit.

• Qualified zone academy bond credit. See Form 8860, Qualified Zone Academy Bond Credit.

• Health coverage tax credit. See Form 8885, Health Coverage Tax Credit.

• Residential energy credits. See Publication 553, Highlights of 2005 Tax Changes.

  To figure the amount to add on line 5 for tax credits, multiply your estimated total credits by the appropriate number from Table 1-1.

Example.

You are married and expect to file a joint return for 2006. Your combined estimated wages are $68,000. Your estimated tax credits include a child and dependent care credit of $960 and a mortgage interest credit of $1,700.

In Table 1-1, section A, the number for your combined estimated wages ($36,001 - $82,000) is 6.7. Multiply your total estimated tax credits of $2,660 by 6.7. Add the result, $17,822, to the amount you would otherwise show on line 5 of the Deductions and Adjustments Worksheet and enter the total on line 5. Because you choose to account for your child and dependent care credit this way, do not make an entry on line F of the Personal Allowances Worksheet.

Nonwage income (worksheet line 6).   Enter on line 6 your estimated total nonwage income (other than tax-exempt income). Nonwage income includes interest, dividends, net rental income, unemployment compensation, alimony, gambling winnings, prizes and awards, hobby income, capital gains, royalties, and partnership income.

  If line 6 is more than line 5, you may not have enough income tax withheld from your wages. See Getting the Right Amount of Tax Withheld, later.

Net deductions and adjustments (worksheet line 7).    If line 7 is less than $3,300, enter “0” on line 8. If line 7 is $3,300 or more, divide it by $3,300, drop any fraction, and enter the result on line 8.

Two-Earner/Two-Job Worksheet

You should complete this worksheet if you have more than one job or are married and you and your spouse both work and the combined earnings from all jobs are more than $35,000 ($25,000 if married).

If you use this worksheet and your earnings are more than $130,000 ($180,000 if you are married), see Publication 919 to check that you are having enough tax withheld.

Table 1-1. Deductions and Adjustments Worksheet (Form W-4) —Line 5

A.Married Filing Jointly or Qualifying Widow(er)
If combined income from all sources is:			Multiply credits by:
$0 - 36,000				10.0
$36,001 - 82,000				6.7
$82,001 - 150,000				4.0
$150,001 - 220,000				3.6
$220,001 - 360,000				3.0
$360,001 and over				2.8
B.Single
If combined income from all sources is:			Multiply credits by:
$0 - 16,000				10.0
$16,001 - 39,000				6.7
$39,001 - 85,000				4.0
$85,001 - 170,000				3.6
$170,001 - 350,000				3.0
$350,001 and over				2.8
C.Head of Household
If combined income from all sources is:			Multiply credits by:
$0 - 25,000				10.0
$25,001 - 55,000				6.7
$55,001 - 125,000				4.0
$125,001 - 190,000				3.6
$190,001 - 355,000				3.0
$355,001 and over				2.8
D.Married Filing Separately
If combined income from all sources is:			Multiply credits by:
$0 - 18,000				10.0
$18,001 - 41,000				6.7
$41,001 - 75,000				4.0
$75,001 - 110,000				3.6
$110,001 - 180,000				3.0
$180,001 and over				2.8

Reducing your allowances (worksheet lines 1-3).   On line 1 of the worksheet, enter the number from line H of the Personal Allowances Worksheet (or line 10 of the Deductions and Adjustments Worksheet, if used). Using Table 1 on Form W-4, find the number listed beside the amount of your estimated wages for the year from your lowest paying job (or if lower, your spouse's job). Enter that number on line 2.

  Subtract line 2 from line 1 and enter the result (but not less than zero) on line 3 and on Form W-4, line 5. If line 1 is more than or equal to line 2, do not use the rest of the worksheet.

  If line 1 is less than line 2, you should complete lines 4 through 9 of the worksheet to figure the additional withholding needed to avoid underwithholding.

Other amounts owed.   If you expect to owe amounts other than income tax, such as self-employment tax, include them on line 8. The total is the additional withholding needed for the year.

In most situations, the tax withheld from your pay will be close to the tax you figure on your return if you follow these two rules.

But because the worksheets and withholding methods do not account for all possible situations, you may not be getting the right amount withheld. This is most likely to happen in the following situations.

It may be helpful for you to know some of the withholding rules your employer must follow. These rules can affect how to fill out your Form W-4 and how to handle problems that may arise.

If you claim exemption from withholding, your employer will not withhold federal income tax from your wages. The exemption applies only to income tax, not to social security or Medicare tax.

You can claim exemption from withholding for 2006 only if both the following situations apply.

Use Figure 1-B, above, to help you decide whether you can claim exemption from withholding. Do not use Figure 1-B if you:

These situations are discussed later.

Students.   If you are a student, you are not automatically exempt. If you work only part time or during the summer, you may qualify for exemption from withholding.

Example 1.

You are a high school student and expect to earn $2,500 from a summer job. You do not expect to have any other income during the year, and your parents will be able to claim an exemption for you on their tax return. You worked last summer and had $375 federal income tax withheld from your pay. The entire $375 was refunded when you filed your 2005 return. Using Figure 1-B, you find that you can claim exemption from withholding.

  

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Figure 1-B: Exemption From Withholding on Form W-4

Example 2.

The facts are the same as in Example 1, except that you also have a savings account and expect to have $320 interest income during the year. Using Figure 1-B, you find that you cannot claim exemption from withholding because your unearned income will be more than $300 and your total income will be more than $850.

  

You may have to file a tax return, even if you are exempt from withholding. See Publication 501 to see whether you must file a return.

  

Age 65 or older or blind. If you are 65 or older or blind, use Worksheet 1-3 or Worksheet 1-4 to help you decide whether you can claim exemption from withholding. Do not use either worksheet if you will itemize deductions, claim exemptions for dependents, or claim tax credits on your 2006 return—instead, see Itemizing deductions or claiming exemptions or credits, next.

Worksheet 1-3.

Exemption From Withholding for Persons Age 65 or Older or Blind

Use this worksheet only if, for 2005 you had a right to a refund of all federal income tax withheld because you had no tax liability.

Caution.This worksheet does not apply if you can be claimed as a dependent. See Worksheet 1-4 instead.

1.	Check the boxes below that apply to you.
	65 or older □	Blind □
2.	Check the boxes below that apply to your spouse if you will claim your spouse's exemption on your 2006 return.
	65 or older □	Blind □
3.	Add the number of boxes you checked in 1 and 2 above. Enter the result
You can claim exemption from withholding if:
Your filing status is:		and the number on line 3 above is:	and your 2006 total income will be no more than:
Single		1	$9,700
		2	10,950
Head of		1	$12,100
household		2	13,350
Married filing		1	$9,450
separately for		2	10,450
both 2004 and		3	11,450
2005		4	12,450
Other married		1	$17,900*
status		2	18,900*
		3	19,900*
		4	20,900*
* Include both spouses' income whether you will file separately or jointly.
Qualifying		1	$14,600
widow(er)		2	15,600
You cannot claim exemption from withholding if your total income will be more than the amount shown for your filing status.

Worksheet 1-4.

Exemption From Withholding for Dependents Age 65 or Older or Blind

Use this worksheet only if, for 2006 you are a dependent and if, for 2005, you had a right to a refund of all federal income tax withheld because you had no tax liability.

1.	Enter your expected earned income plus $300		1.
2.	Minimum amount		2.	$ 850
3.	Compare lines 1 and 2. Enter the larger amount		3.
4.	Limit		4.	5,150
5.	Compare lines 3 and 4. Enter the smaller amount		5.
6.	Enter the appropriate amount from the following table		6.
	Single
	Either 65 or older or blind	$1,250
	Both 65 or older and blind	2,500
	Married filing separately
	Either 65 or older or blind	1,000
	Both 65 or older and blind	2,000
7.	Add lines 5 and 6. Enter the result		7.
8.	Enter your total expected income		8.
You can claim exemption from withholding if line 7 is equal to or more than line 8. You cannot claim exemption from withholding if line 8 is more than line 7.

Supplemental wages include bonuses, commissions, overtime pay, vacation allowances, certain sick pay, and expense allowances under certain plans. The payer can figure withholding on supplemental wages using the same method used for your regular wages. If these payments are identified separately from regular wages, your employer or other payer of supplemental wages can withhold income tax from these wages at a flat rate.

For more information about accountable and nonaccountable plans, see chapter 6 of Publication 463, Travel, Entertainment, Gift, and Car Expenses.

You may have to pay a penalty of $500 if both of the following apply.

There is also a criminal penalty for willfully supplying false or fraudulent information on your Form W-4 or for willfully failing to supply information that would increase the amount withheld. The penalty upon conviction can be either a fine of up to $1,000 or imprisonment for up to one year, or both.

These penalties will apply if you deliberately and knowingly falsify your Form W-4 in an attempt to reduce or eliminate the proper withholding of taxes. A simple error, an honest mistake, will not result in one of these penalties. For example, a person who has tried to figure the number of withholding allowances correctly, but claims seven when the proper number is six, will not be charged a Form W-4 penalty. However, see chapter 4 for information on the underpayment penalty.

Withholding from periodic payments of a pension or annuity is figured in the same way as withholding from salaries and wages. To tell the payer of your pension or annuity how much you want withheld, fill out Form W-4P or a similar form provided by the payer. Follow the rules discussed under Salaries and Wages, earlier, to fill out your Form W-4P.

Tax will be withheld at a flat rate on any nonperiodic payments you receive.

Because withholding on nonperiodic payments does not depend on withholding allowances or whether you are married or single, you cannot use Form W-4P to tell the payer how much to withhold. But you can use Form W-4P to specify that an additional amount be withheld. You can also use Form W-4P to choose not to have tax withheld or to revoke a choice not to have tax withheld.

A distribution you receive that is eligible to be rolled over tax free into a qualified retirement or annuity plan is called an eligible rollover distribution (ERD). This is the taxable part of any distribution from a qualified pension plan or tax-sheltered annuity that is not any of the following.

The payer of a distribution must withhold at a flat rate on any part of an ERD that is not rolled over directly to another qualified plan. You cannot elect not to have withholding on these distributions. No withholding is required on any part paid directly to another plan.

For payments other than eligible rollover distributions, you can choose not to have income tax withheld. The payer will tell you how to make this choice. If you use Form W-4P, check the box on line 1 to make this choice. This choice will remain in effect until you decide you want withholding.

The payer must withhold if either of the following applies:

If you do not have any income tax withheld from your pension or annuity, or if you do not have enough withheld, you may have to pay estimated tax. See chapter 2.

If you do not pay enough tax either through estimated tax or withholding, you may have to pay a penalty. See chapter 4 for information about this penalty.