New Form W-4 required in certain bankruptcy cases. You may need to file a new W-4 to adjust your withholding so that the correct amount of tax is withheld if you file for Chapter 11 bankruptcy and your earnings after the date you file for bankruptcy are included in the income of your bankruptcy estate. You will find more information in Changing Your Withholding later on this page. See chapter 2 for a more detailed list of changes for 2007.

This chapter discusses income tax withholding on:

This chapter explains in detail the rules for withholding tax from each of these types of income. The discussion of salaries and wages includes an explanation of how to complete Form W-4.

This chapter also covers backup withholding on interest, dividends, and other payments.

Income tax is withheld from the pay of most employees. Your pay includes your regular pay, bonuses, commissions, and vacation allowances. It also includes reimbursements and other expense allowances paid under a nonaccountable plan. See Supplemental Wages, on page 13, for definitions of accountable and nonaccountable plans.

If your income is low enough that you will not have to pay income tax for the year, you may be exempt from withholding. This is explained under Exemption From Withholding, starting on page 11.

Completing Form W-4 and Worksheets

When reading the following discussion, you may find it helpful to refer to the filled-in Form W-4 on pages 9 and 10.

Marital Status (Line 3 of Form W-4)

There is a lower withholding rate for people who qualify to check the “Married” box on line 3 of Form W-4. Everyone else must have tax withheld at the higher single rate.

Single.   You must check the “Single” box if any of the following applies.

• You are single. If you are divorced, or separated from your spouse under a court decree of separate maintenance, you are considered single.

• You are married, but neither you nor your spouse is a citizen or resident of the United States.

• You are married, either you or your spouse is a nonresident alien, and you have not chosen to have that person treated as a resident alien for tax purposes. For more information, see Nonresident Spouse Treated as a Resident in chapter 1 of Publication 519.

Married.   You qualify to check the “Married” box if any of the following applies.

• You are married and neither you nor your spouse is a nonresident alien. You are considered married for the whole year even if your spouse died during the year.

• You are married, either you or your spouse is a nonresident alien, and you have chosen to have that person treated as a resident alien for tax purposes. For more information, see Nonresident Spouse Treated as a Resident in chapter 1 of Publication 519.

• You expect to be able to file your return as a qualifying widow or widower. You usually can use this filing status if your spouse died within the previous 2 years and you provide more than half the cost of keeping up a home that was the main home for you and your dependent child for the entire year. However, you must file a new Form W-4 showing your filing status as single by December 1 of the last year you are eligible to file as a qualifying widow or widower. For more information on this filing status, see Qualifying Widow(er) With Dependent Child under Filing Status in Publication 501, Exemptions, Standard Deduction, and Filing Information.

Married, but withhold at higher single rate.   Some married people find that they do not have enough tax withheld at the married rate. This can happen, for example, when both spouses work. To avoid this, you can check the “Married, but withhold at higher Single rate” box (even if you qualify for the married rate). Also, you may find that more tax is withheld if you fill out the Two-Earners/Multiple Jobs Worksheet, explained on page 8.

Withholding Allowances (Line 5 of Form W-4)

The more allowances you claim on Form W-4, the less income tax your employer will withhold. You will have the most tax withheld if you claim “0” allowances. The number of allowances you can claim depends on the following factors.

• How many exemptions you can take on your tax return.

• Whether you have income from more than one job.

• What deductions, adjustments to income, and credits you expect to have for the year.

• Whether you will file as head of household.

If you are married, it also depends on whether your spouse also works and claims any allowances on his or her own Form W-4.

Form W-4 worksheets.   Form W-4 has worksheets to help you figure how many withholding allowances you can claim. The worksheets are for your own records. Do not give them to your employer.

  Complete only one set of Form W-4 worksheets, no matter how many jobs you have. If you are married and will file a joint return, complete only one set of worksheets for you and your spouse, even if you both earn wages and must each give a Form W-4 to your employers. Complete separate sets of worksheets only if you and your spouse will file separate returns.

  If you are not exempt from withholding (see Exemption From Withholding, starting on page 11), complete the Personal Allowances Worksheet on page 1 of the form. Also, use the worksheets on page 2 of the form to adjust the number of your withholding allowances for itemized deductions and adjustments to income, and for two-earner or multiple-job situations. If you want to adjust the number of your withholding allowances for certain tax credits, use the Deductions and Adjustments Worksheet on page 2 of Form W-4, even if you do not have any deductions or adjustments.

  Complete all worksheets that apply to your situation. The worksheets will help you figure the maximum number of withholding allowances you are entitled to claim so that the amount of income tax withheld from your wages will match, as closely as possible, the amount of income tax you will owe at the end of the year.

Multiple jobs.   If you have income from more than one job at the same time, complete only one set of Form W-4 worksheets. Then split your allowances between the Forms W-4 for each job. You cannot claim the same allowances with more than one employer at the same time. You can claim all your allowances with one employer and none with the other(s), or divide them any other way.

Married individuals.   If both you and your spouse are employed and expect to file a joint return, figure your withholding allowances using your combined income, adjustments, deductions, exemptions, and credits. Use only one set of worksheets. You can divide your total allowances any way, but you cannot claim an allowance that your spouse also claims.

  If you and your spouse expect to file separate returns, figure your allowances using separate worksheets based on your own individual income, adjustments, deductions, exemptions, and credits.

Alternative method of figuring withholding allowances.   You do not have to use the Form W-4 worksheets if you use a more accurate method of figuring the number of withholding allowances.

  The method you use must be based on withholding schedules, the tax rate schedules, and the 2007 Estimated Tax Worksheet in chapter 2. It must take into account only the items of income, adjustments to income, deductions, and tax credits that are taken into account on Form W-4.

  You can use the number of withholding allowances determined under an alternative method rather than the number determined using the Form W-4 worksheets. You must still give your employer a Form W-4 claiming your withholding allowances.

Employees who are not citizens or residents.   If you are neither a citizen nor a resident of the United States, you usually can claim only one withholding allowance. However, this rule does not apply if you are a resident of Canada or Mexico, or if you are a U.S. national. It also does not apply if your spouse is a U.S. citizen or resident and you have chosen to be treated as a resident of the United States. Special rules apply to residents of Korea and India. For more information, see Withholding From Compensation in chapter 8 of Publication 519.

Personal Allowances Worksheet

Use the Personal Allowances Worksheet on page 1 of Form W-4 to figure your withholding allowances based on 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 2007, your deduction for personal exemptions on your tax return is reduced if your adjusted gross income (AGI) is more than the AGI shown below for your filing status.

Single	$156,400
Married filing jointly or qualifying widow(er)	$234,600
Married filing separately	$117,300
Head of household	$195,500

If you expect your AGI to be more than that amount, use Worksheet 1-1 (below) 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 if AGI Above Phaseout Threshold

1.	Enter the total number of allowances on lines A, C, and D of the Personal Allowances Worksheet without regard to the phaseout rule			1.
2.	Enter your expected AGI	2.
3.	Enter:
	$156,400 if single
	$234,600 if married filing jointly or qualifying widow(er)
	$117,300 if married filing separately
	$195,500 if head of household	3.
4.	Subtract line 3 from line 2	4.
5.	Divide line 4 by $125,000 ($62,500 if married filing separately). Enter the result as a decimal			5.	.
6.	Multiply line 1 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 1. 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 for 2007.

• 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 filing status (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 of 2007 of your parent whom you can claim as a dependent, or

• 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 2007 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 2007 return. Generally, qualifying expenses are those you pay for the care of your dependent who is your qualifying child 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 under Tax credits on page 7.

Child tax credit (worksheet line G).   If your total income will be less than $57,000 ($85,000 if married), enter “2” on line G for each eligible child.

  If your total income will be between $57,000 and $84,000 ($85,000 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 2007,

• Who did not provide over half of his or her own support for 2007,

• Who lived with you for more than half of 2007, 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 under Tax credits on page 7.

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 the Deductions and Adjustments Worksheet on page 2 of Form W-4 only if you plan to itemize your deductions, claim certain credits, or claim adjustments to the income on your 2007 tax return 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 2006 return (or your 2005 return if you have not yet filed your 2006 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 2006 or 2007.

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

Example.

On June 30, 2006, you bought your first home. On your 2006 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 2007 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).   Enter your estimated total itemized deductions on line 1 of the worksheet.

  Listed below are some of the deductions you can take into account when figuring additional withholding allowances for 2007. You normally claim these deductions on Schedule A of Form 1040.

1. Medical and dental expenses that are more than 7.5% of your 2007 AGI (defined under AGI on this page).

2. State and local income or sales 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 AGI.

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 AGI, 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.

AGI.    For purposes of the worksheet your AGI is your estimated total income for 2007 minus any estimated adjustments to income (discussed later on this page) that you include on line 4 of the worksheet.

  

Phaseout of itemized deductions. For 2007, your total itemized deductions may be phased out (reduced) if your AGI is more than $156,400 ($78,200 if married filing separately). If you expect your AGI to be more than that amount, use Worksheet 1-2 (below) 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.	Is the amount on line 2 less than the amount on line 1?
	□ No. Stop here. Your deduction is not limited. Enter the amount from line 1 above on line 1 of the Deductions and Adjustments Worksheet.
	□ Yes. Subtract line 2 from line 1				3.
4.	Multiply line 3 by 80% (.80)		4.
5.	Enter your expected AGI		5.
6.	Enter $156,400 ($78,200 if married filing separately)		6.
7.	Is the amount on line 6 less than the amount on line 5?
	□ No. Stop here. Your deduction is not limited. Enter the amount from line 1 above on line 1 of the Deductions and Adjustments Worksheet.
	□ Yes. 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.

(Form W-4)—Line 1">

Adjustments to income (worksheet line 4).   Enter your estimated total adjustments to income on line 4 of the Deductions and Adjustments Worksheet.

  You can take the following adjustments to income into account when figuring additional withholding allowances for 2007. 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.

• Educator expenses.

• 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.

• Tuition and fees 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.

Tax credits (worksheet line 5).   Although you can take most tax credits into account when figuring withholding allowances, the Personal Allowances Worksheet uses only the child and dependent care credit (line F) 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. 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.

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

• Adoption credit. See the instructions for Form 8839.

• Mortgage interest credit. See 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.

• General business credit. See Form 3800.

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

• Alternative motor vehicle credit. See Form 8910.

• Alternative fuel vehicle refueling property credit. See Form 8911.

• Credits for clean renewable energy bonds and Gulf bonds. See Form 8912.

• Qualified zone academy bond credit. See Form 8860.

• Health coverage tax credit. See Form 8885.

• Residential energy credits. See Form 5695.

• Empowerment zone and renewal community employment credit. See Form 8844.

• Credit for alcohol used as fuel. See Form 6478.

• Renewable electricity, refined coal, and Indian coal production credit. See Form 8835, Section B.

• New York Liberty Zone business employee credit. If you have a carryforward from Form 8884, see Form 8835, Section B.

• District of Columbia First-Time Homebuyer Credit. See Form 8859.

Figuring line 5 entry.   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 2007. 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 (total credits = $2,660).

In Table 1-1, section A, the number corresponding to your combined estimated wages ($37,001 - $85,000) is 6.7. Multiply your total estimated tax credits of $2,660 by 6.7. Add the result, $17,822, to the amount you otherwise would 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, on page 8.

Net deductions and adjustments (worksheet line 7).    If line 7 is less than $3,400, enter “0” on line 8. If line 7 is $3,400 or more, divide it by $3,400, drop any fraction, and enter the result on line 8.

Example.

If line 7 is $5,200, $5,200 ÷ $3,400 = 1.53. Drop the fraction (.53) and enter “1” on line 8.

Two-Earners/Multiple Jobs Worksheet

Complete the Two-Earners/Multiple Jobs Worksheet on page 2 of Form W-4 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 $40,000 ($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 - 37,000				10.0
$37,001 - 85,000				6.7
$85,001 - 155,000				4.0
$155,001 - 230,000				3.6
$230,001 - 380,000				3.0
$380,001 and over				2.8
B.Single
If combined income from all sources is:			Multiply credits by:
$0 - 17,000				10.0
$17,001 - 40,000				6.7
$40,001 - 90,000				4.0
$90,001 - 175,000				3.6
$175,001 - 370,000				3.0
$370,001 and over				2.8
C.Head of Household
If combined income from all sources is:			Multiply credits by:
$0 - 26,000				10.0
$26,001 - 57,000				6.7
$57,001 - 130,000				4.0
$130,001 - 200,000				3.6
$200,001 - 370,000				3.0
$370,001 and over				2.8
D.Married Filing Separately
If combined income from all sources is:			Multiply credits by:
$0 - 18,500				10.0
$18,501 - 42,500				6.7
$42,501 - 77,500				4.0
$77,501 - 115,000				3.6
$115,001 - 190,000				3.0
$190,001 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, 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.

Illustrated Example—Form W-4

Joyce Green works in a bookstore and expects to earn about $13,300. Her husband, John, works full time at the Acme Corporation, where his expected pay is $48,500. They file a joint income tax return and claim exemptions for their two children. Because they file jointly, they use only one set of Form W-4 worksheets to figure the number of withholding allowances. The Greens' worksheets and John's W-4 are shown in Figure 1-A, beginning on page 9.

Personal Allowances Worksheet.   On this worksheet, John and Joyce claim allowances for themselves and their children by entering “1” on line A, “1” on line C, and “2” on line D. Because both John and Joyce will receive wages of more than $1,000, they are not entitled to the additional withholding allowance on line B. The Greens expect to have child and dependent care expenses of $2,400. They enter “1” on line F of the worksheet. Because they are married, their total income will be less than $85,000, and they have two eligible children, they enter “4” on line G.

  They enter their total personal allowances, “9,” on line H.

Deductions and Adjustments Worksheet.   Because they plan to itemize deductions and claim adjustments to income, the Greens use this worksheet to see whether they are entitled to additional allowances.

  The Greens' estimated itemized deductions total $11,300, which they enter on line 1 of the worksheet. Because they will file a joint return, they enter $10,700 on line 2. They subtract $10,700 from $11,300 and enter the result, $600, on line 3.

  The Greens expect to have an adjustment to income of $3,000 for their deductible IRA contributions. They do not expect to have any other adjustments to income. They enter $3,000 on line 4.

  The Greens add line 3 and line 4 and enter the total, $3,600, on line 5.

  Joyce and John expect to receive $600 in interest and dividend income during the year. They enter $600 on line 6 and subtract line 6 from line 5. They enter the result, $3,000, on line 7. They divide line 7 by $3,400, and drop the fraction to determine zero additional allowances. They enter “0” on line 8.

  The Greens enter “9” (the number from line H of the Personal Allowances Worksheet) on line 9 and add it to line 8. They enter “9” on line 10.

Two-Earners/Multiple Jobs Worksheet.   The Greens use this worksheet because they both work and together earn over $25,000. They enter “9” (the number from line 10 of the Deductions and Adjustments Worksheet) on line 1.

  Next, they use Table 1 to find the number to enter on line 2 of the worksheet. Because they will file a joint return and their expected wages from their lowest paying job are $13,300, they enter “2” on line 2. They subtract line 2 from line 1 and enter “7” on line 3 of the worksheet and on Form W-4, line 5.

  John and Joyce Green can take a total of 7 withholding allowances between them. They decide that John will take all 7 allowances on his Form W-4. Joyce, therefore, cannot claim any allowances on hers. She will enter “0” on line 5 of the Form W-4 she gives to her employer.

This image is too large to be displayed in the current screen. Please click the link to view the image.

Figure 1-A. Illustrated Example--Form W-4 (John and Joyce Green)

Form W-4 (2007). Summary: This is an example of Form W-4 (2007) with items included as described in the text. Additionally, these line items are completed:

“1. Type or print your first name and middle initial” field contains John M.

“Last name” field contains Green “Home address (number and street or rural route)” field contains 28 Fairway “City or town, state, and ZIP code” field contains Anytown, State 00000

“2. Your social security number” field contains 444-00-4444

“3. Married” checkbox checked

“Employee's signature (Form is not valid unless you sign it.)” field contains John M. Green

“Date” field contains January 4, 2007

This image is too large to be displayed in the current screen. Please click the link to view the image.

Figure 1-A. Illustrated Example--Form W-4 (Continued)

Form W-4 (2007) Page 2. Summary: This is an example of Form W-4 (2007), page 2 with items included as described in the text.

Exemption From Withholding

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 2007 only if both of the following situations apply.

• For 2006 you had a right to a refund of all federal income tax withheld because you had no tax liability.

• For 2007 you expect a refund of all federal income tax withheld because you expect to have no tax liability.

Use Figure 1-B, on page 11, to help you decide whether you can claim exemption from withholding. Do not use Figure 1-B if you:

• Are 65 or older.

• Are blind.

• Will itemize deductions on your 2007 return.

• Will claim an exemption for a dependent on your 2007 return.

• Will claim any tax credits on your 2007 return.

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 2006 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

Figure 1-B. Exemption From Withholding on Form W-4. Summary: This is a flowchart used to determine if the taxpayer is allowed to claim exemption from withholding on his Form W-4.Start. This is the start of the flowchart.Decision (1). For 2006, did you have a right to a refund of ALL federal income tax withheld because you had NO tax liability?

IF Yes Continue To Decision (2)

IF No Continue To Process (a)

Process (a). You CANNOT claim exemption from withholding.

Continue To End

Decision (2). For 2007, will someone (such as your parent) be able to claim you as a dependent?

IF Yes Continue To Decision (4)

IF No Continue To Decision (3)

Decision (3). Will your 2007 total income be more than the amount shown below for your filing status?

Single: $8,750

Head of household: 11,250

Married filing separately for BOTH 2006 and 2007: 8,750

Other married status (include BOTH spouses' income whether filing separately or jointly): 17,500

Qualifying widow(er): 14,100

IF Yes Continue To Process (a)

IF No Continue To Process (b)

Process (b). You CAN claim exemption from withholding.

Continue To End

Decision (4). Will your 2007 income be more than $850?

IF Yes Continue To Decision (5)

IF No Continue To Process (b)

Decision (5). Will your 2007 income include more than $300 of unearned income (interest, dividends, etcetera)?

IF Yes Continue To Process (a)

IF No Continue To Decision (6)

Decision (6). Will your 2007 total income be $5,350 or less?

IF Yes Continue To Process (b)

IF No Continue To Process (a)

End. This is the end of the flowchart.

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 (see below) 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 2007 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 2006 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 2007 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 2007 total income will be no more than:
Single		1	$10,050
		2	11,350
Head of		1	$12,550
household		2	13,850
Married filing		1	$9,800
separately for		2	10,850
both 2005 and		3	11,900
2006		4	12,950
Other married		1	$18,550*
status		2	19,600*
		3	20,650*
		4	21,700*
* Include both spouses' income whether you will file separately or jointly.
Qualifying		1	$15,150
widow(er)		2	16,200
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 2007, you are a dependent and if, for 2006, 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.	5,350
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	$1,300
	Both 65 or older and blind	2,600
	Married filing separately
	Either 65 or older or blind	1,050
	Both 65 or older and blind	2,100
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.

Itemizing deductions or claiming exemptions or credits.   If you had no tax liability for 2006, and you will:

• Itemize deductions,

• Claim an exemption for a dependent, or

• Claim a tax credit,

use the 2007 Estimated Tax Worksheet in Form 1040-ES (also see chapter 2), to figure your 2007 expected tax liability. You can claim exemption from withholding only if your total expected tax liability (line 13c of the worksheet) is zero.

Claiming exemption from withholding.   To claim exemption, you must give your employer a Form W-4. Do not complete lines 5 and 6. Enter “Exempt” on line 7.

  If you claim exemption, but later your situation changes so that you will have to pay income tax after all, you must file a new Form W-4 within 10 days after the change. If you claim exemption in 2007, but you expect to owe income tax for 2008, you must file a new Form W-4 by December 1, 2007.

  Your claim of exempt status may be reviewed by the IRS. See IRS review of your withholding, on page 11.

An exemption is good for only one year.    You must give your employer a new Form W-4 by February 15 each year to continue your exemption.

The tips you receive while working on your job are considered part of your pay. You must include your tips on your tax return on the same line as your regular pay. However, tax is not withheld directly from tip income, as it is from your regular pay. Nevertheless, your employer will take into account the tips you report when figuring how much to withhold from your regular pay.

The value of certain noncash fringe benefits you receive from your employer is considered part of your pay. Your employer generally must withhold income tax on these benefits from your regular pay.

Although the value of your personal use of an employer-provided car, truck, or other highway motor vehicle is taxable, your employer can choose not to withhold income tax on that amount. Your employer must notify you if this choice is made.

Sick pay is a payment to you to replace your regular wages while you are temporarily absent from work due to sickness or personal injury. To qualify as sick pay, it must be paid under a plan to which your employer is a party.

If you receive sick pay from your employer or an agent of your employer, income tax must be withheld. An agent who does not pay regular wages to you may choose to withhold income tax at a flat rate.

However, if you receive sick pay from a third party who is not acting as an agent of your employer, income tax will be withheld only if you choose to have it withheld. See Form W-4S, on this page.

If you receive payments under a plan in which your employer does not participate (such as an accident or health plan where you paid all the premiums), the payments are not sick pay and usually are not taxable.

Income tax usually will be withheld from your pension or annuity distributions unless you choose not to have it withheld. This rule applies to distributions from:

The amount withheld depends on whether you receive payments spread out over more than 1 year (periodic payments), within 1 year (nonperiodic payments), or as an eligible rollover distribution (ERD). You cannot choose not to have income tax withheld from an ERD. ERDs are discussed on page 15 under Eligible Rollover Distributions.

Nonperiodic Payments

Tax will be withheld at a flat 10% 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 also can use Form W-4P to choose not to have tax withheld or to revoke a choice not to have tax withheld.

You may need to use Form W-4P to ask for additional withholding. If you do not have enough tax withheld, you may need to pay estimated tax, as explained in chapter 2.

Income tax is withheld at a flat 25% rate from certain kinds of gambling winnings.

Gambling winnings of more than $5,000 from the following sources are subject to income tax withholding.

It does not matter whether your winnings are paid in cash, in property, or as an annuity. Winnings not paid in cash are taken into account at their fair market value.

If you do not pay enough tax through withholding or estimated tax, you may be subject to a penalty. See chapter 4.

You can choose to have income tax withheld from unemployment compensation. To make this choice, you will have to fill out Form W-4V (or a similar form provided by the payer) and give it to the payer.

Unemployment compensation is taxable. So, if you do not have income tax withheld, you may have to pay estimated tax. See chapter 2.

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

You can choose to have income tax withheld from certain federal payments you receive. These payments are:

To make this choice, fill out Form W-4V (or a similar form provided by the payer) and give it to the payer.

If you do not choose to have income tax withheld, you may have to pay estimated tax. See chapter 2.

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

Banks or other businesses that pay you certain kinds of income must file an information return (Form 1099) with the IRS. The information return shows how much you were paid during the year. It also includes your name and taxpayer identification number (TIN). TINs are explained later in this discussion.

These payments generally are not subject to withholding. However, “backup” withholding is required in certain situations.