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Www statetaxforms 2. Www statetaxforms   American Opportunity Credit Table of Contents Introduction Can You Claim the CreditWho Can Claim the Credit Who Cannot Claim the Credit What Expenses QualifyQualified Education Expenses No Double Benefit Allowed Expenses That Do Not Qualify Who Is an Eligible StudentException. Www statetaxforms Who Can Claim a Dependent's Expenses Figuring the CreditEffect of the Amount of Your Income on the Amount of Your Credit Refundable Part of Credit Claiming the Credit Introduction For 2013, there are two tax credits available to help you offset the costs of higher education by reducing the amount of your income tax. Www statetaxforms They are the American opportunity credit (this chapter) and the lifetime learning credit ( chapter 3 ). Www statetaxforms This chapter explains: Who can claim the American opportunity credit, What expenses qualify for the credit, Who is an eligible student, Who can claim a dependent's expenses, How to figure the credit, How to claim the credit, and When the credit must be repaid. Www statetaxforms What is the tax benefit of the American opportunity credit. Www statetaxforms   For the tax year, you may be able to claim an American opportunity credit of up to $2,500 for qualified education expenses paid for each eligible student. Www statetaxforms   A tax credit reduces the amount of income tax you may have to pay. Www statetaxforms Unlike a deduction, which reduces the amount of income subject to tax, a credit directly reduces the tax itself. Www statetaxforms Forty percent of the American opportunity credit may be refundable. Www statetaxforms This means that if the refundable portion of your credit is more than your tax, the excess will be refunded to you. Www statetaxforms   Your allowable American opportunity credit may be limited by the amount of your income. Www statetaxforms Also, the nonrefundable part of the credit may be limited by the amount of your tax. Www statetaxforms Overview of the American opportunity credit. Www statetaxforms   See Table 2-1, Overview of the American Opportunity Credit , for the basics of this credit. Www statetaxforms The details are discussed in this chapter. Www statetaxforms Can you claim more than one education credit this year. Www statetaxforms   For each student, you can elect for any year only one of the credits. Www statetaxforms For example, if you elect to take the American opportunity credit for a child on your 2013 tax return, you cannot use that same child's qualified education expenses to figure the lifetime learning credit for 2013. Www statetaxforms   If you pay qualified education expenses for more than one student in the same year, you can choose to take the American opportunity credit on a per-student, per-year basis. Www statetaxforms If you pay qualified education expenses for a student (or students) for whom you do not claim the American opportunity credit, you can use the adjusted qualified education expenses of that student (or those students) in figuring your lifetime learning credit. Www statetaxforms This means that, for example, you can claim the American opportunity credit for one student and the lifetime learning credit for another student in the same year. Www statetaxforms Differences between the American opportunity and lifetime learning credits. Www statetaxforms   There are several differences between these two credits. Www statetaxforms For example, you can claim the American opportunity credit based on the same student's expenses for no more than 4 tax years, which includes any tax years you claimed the Hope Scholarship Credit for that student. Www statetaxforms However, there is no limit on the number of years for which you can claim a lifetime learning credit based on the same student's expenses. Www statetaxforms The differences between these credits are shown in Appendix B, Highlights of Education Tax Benefits for Tax Year 2013 near the end of this publication. Www statetaxforms If you claim the American opportunity credit for any student, you can choose between using that student's adjusted qualified education expenses for the American opportunity credit or the lifetime learning credit. Www statetaxforms If you have the choice, the American opportunity credit will always be greater than the lifetime learning credit. Www statetaxforms Table 2-1. Www statetaxforms Overview of the American Opportunity Credit Maximum credit Up to $2,500 credit per eligible student Limit on modified adjusted gross income (MAGI) $180,000 if married filing jointly; $90,000 if single, head of household, or qualifying widow(er) Refundable or nonrefundable 40% of credit may be refundable; the rest is nonrefundable Number of years of postsecondary education Available ONLY if the student had not completed the first 4 years of postsecondary education before 2013 Number of tax years credit available Available ONLY for 4 tax years per eligible student (including any year(s) Hope Scholarship Credit was claimed) Type of program required Student must be pursuing a program leading to a degree or other recognized education credential Number of courses Student must be enrolled at least half time for at least one academic period that begins during the tax year Felony drug conviction As of the end of 2013, the student had not been convicted of a felony for possessing or distributing a controlled substance Qualified expenses Tuition, required enrollment fees, and course materials that the student needs for a course of study whether or not the materials are bought at the educational institution as a condition of enrollment or attendance Payments for academic periods Payments made in 2013 for academic periods beginning in 2013 or beginning in the first 3 months of 2014 Can You Claim the Credit The following rules will help you determine if you are eligible to claim the American opportunity credit on your tax return. Www statetaxforms Who Can Claim the Credit Generally, you can claim the American opportunity credit if all three of the following requirements are met. Www statetaxforms You pay qualified education expenses of higher education. Www statetaxforms You pay the education expenses for an eligible student. Www statetaxforms The eligible student is either yourself, your spouse, or a dependent for whom you claim an exemption on your tax return. Www statetaxforms Student qualifications. Www statetaxforms   Generally, you can take the American opportunity credit for a student only if all of the following four requirements are met. Www statetaxforms As of the beginning of 2013, the student had not completed the first four years of postsecondary education (generally, the freshman through senior years of college), as determined by the eligible educational institution. Www statetaxforms For this purpose, do not include academic credit awarded solely because of the student's performance on proficiency examinations. Www statetaxforms Neither the American opportunity credit nor the Hope Scholarship Credit has been claimed (by you or anyone else) for this student for any four tax years before 2013. Www statetaxforms If the American opportunity credit (and Hope Scholarship Credit) has been claimed for this student for any three or fewer tax years before 2013, this requirement is met. Www statetaxforms For at least one academic period beginning (or treated as beginning) in 2013, the student both: Was enrolled in a program that leads to a degree, certificate, or other recognized educational credential; and Carried at least one-half the normal full-time workload for his or her course of study. Www statetaxforms The standard for what is half of the normal full-time work load is determined by each eligible educational institution. Www statetaxforms However, the standard may not be lower than any of those established by the U. Www statetaxforms S. Www statetaxforms Department of Education under the Higher Education Act of 1965. Www statetaxforms For purposes of whether the student satisfies this third requirement for 2013, treat an academic period beginning in the first three months of 2014 as if it began in 2013 if qualified education expenses for the student were paid in 2013 for that academic period. Www statetaxforms See Prepaid expenses, later. Www statetaxforms As of the end of 2013, the student had not been convicted of a federal or state felony for possessing or distributing a controlled substance. Www statetaxforms Example 1. Www statetaxforms Sharon was eligible for the Hope Scholarship Credit for 2007 and 2008 and for the American opportunity credit for 2010 and 2012. Www statetaxforms Her parents claimed the Hope Scholarship Credit for Sharon on their tax returns for 2007 and 2008 and claimed the American opportunity credit for Sharon on their 2010 tax return. Www statetaxforms Sharon claimed the American opportunity credit on her 2012 tax return. Www statetaxforms The American opportunity credit and Hope Scholarship Credit have been claimed for Sharon for four tax years before 2013. Www statetaxforms Therefore, the American opportunity credit cannot be claimed by Sharon for 2013. Www statetaxforms If Sharon were to file Form 8863 for 2013, she would check “Yes” for Part III, line 23, and would be eligible to claim only the lifetime learning credit. Www statetaxforms Example 2. Www statetaxforms Wilbert was eligible for the American opportunity credit for 2009, 2010, 2011, and 2013. Www statetaxforms His parents claimed the American opportunity credit for Wilbert on their tax returns for 2009, 2010, and 2011. Www statetaxforms No one claimed an American opportunity credit or Hope Scholarship Credit for Wilbert for any other tax year. Www statetaxforms The American opportunity credit and Hope Scholarship Credit have been claimed for Wilbert for only three tax years before 2013. Www statetaxforms Therefore, Wilbert meets the second requirement to be eligible for the American opportunity credit. Www statetaxforms If Wilbert were to file Form 8863 for 2013, he would check “No” for Part III, line 23. Www statetaxforms If Wilbert meets all of the other requirements, he is eligible for the American opportunity credit. Www statetaxforms Example 3. Www statetaxforms Glenda enrolls on a full-time basis in a degree program for the 2014 Spring semester, which begins in January 2014. Www statetaxforms Glenda pays her tuition for the 2014 Spring semester in December 2013. Www statetaxforms Because the tuition Glenda paid in 2013 relates to an academic period that begins in the first 3 months of 2014, her eligibility to claim an American opportunity credit in 2013 is determined as if the 2014 Spring semester began in 2013. Www statetaxforms If the requirements above are not met for any student, you cannot take the American opportunity credit for that student. Www statetaxforms You may be able to take the lifetime learning credit for part or all of that student's qualified education expenses instead. Www statetaxforms Note. Www statetaxforms Qualified education expenses paid by a dependent for whom you claim an exemption, or by a third party for that dependent, are considered paid by you. Www statetaxforms “Qualified education expenses” are defined later under Qualified Education Expenses . Www statetaxforms “Eligible students” are defined later under Who Is an Eligible Student . Www statetaxforms A dependent for whom you claim an exemption is defined later under Who Can Claim a Dependent's Expenses . Www statetaxforms You may find Figure 2-1, Can You Claim the American Opportunity Credit for 2013 , later, helpful in determining if you can claim an American opportunity credit on your tax return. Www statetaxforms This image is too large to be displayed in the current screen. Www statetaxforms Please click the link to view the image. Www statetaxforms Figure 2-1 Can you claim the American opportunity credit for 2012? Who Cannot Claim the Credit You cannot claim the American opportunity credit for 2013 if any of the following apply. Www statetaxforms Your filing status is married filing separately. Www statetaxforms You are listed as a dependent on another person's tax return (such as your parents'). Www statetaxforms See Who Can Claim a Dependent's Expenses , later. Www statetaxforms Your modified adjusted gross income (MAGI) is $90,000 or more ($180,000 or more in the case of a joint return). Www statetaxforms MAGI is explained later under Effect of the Amount of Your Income on the Amount of Your Credit . Www statetaxforms You (or your spouse) were a nonresident alien for any part of 2013 and the nonresident alien did not elect to be treated as a resident alien for tax purposes. Www statetaxforms More information on nonresident aliens can be found in Publication 519, U. Www statetaxforms S. Www statetaxforms Tax Guide for Aliens. Www statetaxforms What Expenses Qualify The American opportunity credit is based on adjusted qualified education expenses you pay for yourself, your spouse, or a dependent for whom you claim an exemption on your tax return. Www statetaxforms Generally, the credit is allowed for adjusted qualified education expenses paid in 2013 for an academic period beginning in 2013 or beginning in the first three months of 2014. Www statetaxforms For example, if you paid $1,500 in December 2013 for qualified tuition for the spring 2014 semester beginning January 2014, you can use that $1,500 in figuring your 2013 credit. Www statetaxforms Academic period. Www statetaxforms   An academic period includes a semester, trimester, quarter, or other period of study (such as a summer school session) as reasonably determined by an educational institution. Www statetaxforms In the case of an educational institution that uses credit hours or clock hours and does not have academic terms, each payment period can be treated as an academic period. Www statetaxforms Paid with borrowed funds. Www statetaxforms   You can claim an American opportunity credit for qualified education expenses paid with the proceeds of a loan. Www statetaxforms Use the expenses to figure the American opportunity credit for the year in which the expenses are paid, not the year in which the loan is repaid. Www statetaxforms Treat loan payments sent directly to the educational institution as paid on the date the institution credits the student's account. Www statetaxforms Student withdraws from class(es). Www statetaxforms   You can claim an American opportunity credit for qualified education expenses not refunded when a student withdraws. Www statetaxforms Qualified Education Expenses For purposes of the American opportunity credit, qualified education expenses are tuition and certain related expenses required for enrollment or attendance at an eligible educational institution. Www statetaxforms Eligible educational institution. Www statetaxforms   An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U. Www statetaxforms S. Www statetaxforms Department of Education. Www statetaxforms It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. Www statetaxforms The educational institution should be able to tell you if it is an eligible educational institution. Www statetaxforms   Certain educational institutions located outside the United States also participate in the U. Www statetaxforms S. Www statetaxforms Department of Education's Federal Student Aid (FSA) programs. Www statetaxforms Related expenses. Www statetaxforms   Student-activity fees are included in qualified education expenses only if the fees must be paid to the institution as a condition of enrollment or attendance. Www statetaxforms   However, expenses for books, supplies, and equipment needed for a course of study are included in qualified education expenses whether or not the materials are purchased from the educational institution. Www statetaxforms Prepaid expenses. Www statetaxforms   Qualified education expenses paid in 2013 for an academic period that begins in the first three months of 2014 can be used in figuring an education credit for 2013 only. Www statetaxforms See Academic period, earlier. Www statetaxforms For example, if you pay $2,000 in December 2013, for qualified tuition for the 2014 winter quarter that begins in January 2014, you can use that $2,000 in figuring an education credit for 2013 only (if you meet all the other requirements). Www statetaxforms    You cannot use any amount you paid in 2012 or 2014 to figure the qualified education expenses you use to figure your 2013 education credit(s). Www statetaxforms   In the following examples, assume that each student is an eligible student at an eligible educational institution. Www statetaxforms Example 1. Www statetaxforms Jefferson is a sophomore in University V's degree program in dentistry. Www statetaxforms This year, in addition to tuition, he is required to pay a fee to the university for the rental of the dental equipment he will use in this program. Www statetaxforms Because the equipment rental is needed for his course of study, Jefferson's equipment rental fee is a qualified expense. Www statetaxforms Example 2. Www statetaxforms Grace and William, both first-year students at College W, are required to have certain books and other reading materials to use in their mandatory first-year classes. Www statetaxforms The college has no policy about how students should obtain these materials, but any student who purchases them from College W's bookstore will receive a bill directly from the college. Www statetaxforms William bought his books from a friend; Grace bought hers at College W's bookstore. Www statetaxforms Both are qualified education expenses for the American opportunity credit. Www statetaxforms Example 3. Www statetaxforms When Kelly enrolled at College X for her freshman year, she had to pay a separate student activity fee in addition to her tuition. Www statetaxforms This activity fee is required of all students, and is used solely to fund on-campus organizations and activities run by students, such as the student newspaper and the student government. Www statetaxforms No portion of the fee covers personal expenses. Www statetaxforms Although labeled as a student activity fee, the fee is required for Kelly's enrollment and attendance at College X and is a qualified expense. Www statetaxforms No Double Benefit Allowed You cannot do any of the following. Www statetaxforms Deduct higher education expenses on your income tax return (as, for example, a business expense) and also claim an American opportunity credit based on those same expenses. Www statetaxforms Claim an American opportunity credit in the same year that you are claiming a tuition and fees deduction for the same student. Www statetaxforms Claim an American opportunity credit for any student and use any of that student's expenses in figuring your lifetime learning credit. Www statetaxforms Figure the tax-free portion of a distribution from a Coverdell education savings account (ESA) or qualified tuition program (QTP) using the same expenses you used to figure the American opportunity credit. Www statetaxforms See Coordination With American Opportunity and Lifetime Learning Credits in chapter 7, Coverdell Education Savings Account, and Coordination With American Opportunity and Lifetime Learning Credits in chapter 8, Qualified Tuition Program. Www statetaxforms Claim a credit based on qualified education expenses paid with tax-free educational assistance, such as a scholarship, grant, or assistance provided by an employer. Www statetaxforms See Adjustments to Qualified Education Expenses, next. Www statetaxforms Adjustments to Qualified Education Expenses For each student, reduce the qualified education expenses paid by or on behalf of that student under the following rules. Www statetaxforms The result is the amount of adjusted qualified education expenses for each student. Www statetaxforms Tax-free educational assistance. Www statetaxforms   For tax-free educational assistance received in 2013, reduce the qualified educational expenses for each academic period by the amount of tax-free educational assistance allocable to that academic period. Www statetaxforms See Academic period, earlier. Www statetaxforms   Some tax-free educational assistance received after 2013 may be treated as a refund of qualified education expenses paid in 2013. Www statetaxforms This tax-free educational assistance is any tax-free educational assistance received by you or anyone else after 2013 for qualified education expenses paid on behalf of a student in 2013 (or attributable to enrollment at an eligible educational institution during 2013). Www statetaxforms   If this tax-free educational assistance is received after 2013 but before you file your 2013 income tax return, see Refunds received after 2013 but before your income tax return is filed, later. Www statetaxforms If this tax-free educational assistance is received after 2013 and after you file your 2013 income tax return, see Refunds received after 2013 and after your income tax return is filed, later. Www statetaxforms   Tax-free educational assistance includes: The tax-free parts of scholarships and fellowships (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Pell grants (see Pell Grants and Other Title IV Need-Based Education Grants in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions). Www statetaxforms Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), and Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. Www statetaxforms Generally, any scholarship or fellowship is treated as tax free. Www statetaxforms However, a scholarship or fellowship is not treated as tax free to the extent the student includes it in gross income (if the student is required to file a tax return for the year the scholarship or fellowship is received) and either of the following is true. Www statetaxforms The scholarship or fellowship (or any part of it) must be applied (by its terms) to expenses (such as room and board) other than qualified education expenses as defined in Qualified education expenses in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. Www statetaxforms The scholarship or fellowship (or any part of it) may be applied (by its terms) to expenses (such as room and board) other than qualified education expenses as defined in Qualified education expenses in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. Www statetaxforms You may be able to increase the combined value of an education credit and certain educational assistance if the student includes some or all of the educational assistance in income in the year it is received. Www statetaxforms For examples, see Coordination with Pell grants and other scholarships, later. Www statetaxforms Refunds. Www statetaxforms   A refund of qualified education expenses may reduce adjusted qualified education expenses for the tax year or require repayment (recapture) of a credit claimed in an earlier year. Www statetaxforms Some tax-free educational assistance received after 2013 may be treated as a refund. Www statetaxforms See Tax-free educational assistance, earlier. Www statetaxforms Refunds received in 2013. Www statetaxforms   For each student, figure the adjusted qualified education expenses for 2013 by adding all the qualified education expenses for 2013 and subtracting any refunds of those expenses received from the eligible educational institution during 2013. Www statetaxforms Refunds received after 2013 but before your income tax return is filed. Www statetaxforms   If anyone receives a refund after 2013 of qualified education expenses paid on behalf of a student in 2013 and the refund is paid before you file an income tax return for 2013, the amount of qualified education expenses for 2013 is reduced by the amount of the refund. Www statetaxforms Refunds received after 2013 and after your income tax return is filed. Www statetaxforms   If anyone receives a refund after 2013 of qualified education expenses paid on behalf of a student in 2013 and the refund is paid after you file an income tax return for 2013, you may need to repay some or all of the credit. Www statetaxforms See Credit recapture, next. Www statetaxforms Credit recapture. Www statetaxforms    If any tax-free educational assistance for the qualified education expenses paid in 2013, or any refund of your qualified education expenses paid in 2013, is received after you file your 2013 income tax return, you must recapture (repay) any excess credit. Www statetaxforms You do this by refiguring the amount of your adjusted qualified education expenses for 2013 by reducing the expenses by the amount of the refund or tax-free educational assistance. Www statetaxforms You then refigure your education credit(s) for 2013 and figure the amount by which your 2013 tax liability would have increased if you claimed the refigured credit(s). Www statetaxforms Include that amount as an additional tax for the year the refund or tax-free assistance was received. Www statetaxforms Example. Www statetaxforms   You paid $7,000 tuition and fees in August 2013, and your child began college in September 2013. Www statetaxforms You filed your 2013 tax return on February 17, 2014, and claimed an American opportunity credit of $2,500. Www statetaxforms After you filed your return, you received a refund of $4,000. Www statetaxforms You must refigure your 2013 American opportunity credit using $3,000 of qualified education expenses instead of $7,000. Www statetaxforms The refigured credit is $2,250. Www statetaxforms The increase to your tax liability is also $250. Www statetaxforms Include the difference of $250 as additional tax on your 2014 tax return. Www statetaxforms See the instructions for your 2014 income tax return to determine where to include this tax. Www statetaxforms If you pay qualified education expenses in 2014 for an academic period that begins in the first 3 months of 2014 and you receive tax-free educational assistance, or a refund, as described above, you may choose to reduce your qualified education expenses for 2014 instead of reducing your expenses for 2013. Www statetaxforms Amounts that do not reduce qualified education expenses. Www statetaxforms   Do not reduce qualified education expenses by amounts paid with funds the student receives as: Payment for services, such as wages, A loan, A gift, An inheritance, or A withdrawal from the student's personal savings. Www statetaxforms   Do not reduce the qualified education expenses by any scholarship or fellowship reported as income on the student's tax return in the following situations. Www statetaxforms The use of the money is restricted, by the terms of the scholarship or fellowship, to costs of attendance (such as room and board) other than qualified education expenses as defined in Qualified education expenses in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. Www statetaxforms The use of the money is not restricted. Www statetaxforms Example 1. Www statetaxforms Joan paid $3,000 for tuition and $5,000 for room and board at University X. Www statetaxforms The university did not require her to pay any fees in addition to her tuition in order to enroll in or attend classes. Www statetaxforms To help pay these costs, she was awarded a $2,000 scholarship and a $4,000 student loan. Www statetaxforms The terms of the scholarship state that it can be used to pay any of Joan's college expenses. Www statetaxforms University X applies the $2,000 scholarship against Joan's $8,000 total bill, and Joan pays the $6,000 balance of her bill from University X with a combination of her student loan and her savings. Www statetaxforms Joan does not report any portion of the scholarship as income on her tax return. Www statetaxforms In figuring the amount of either education credit (American opportunity or lifetime learning), Joan must reduce her qualified education expenses by the amount of the scholarship ($2,000) because she excluded the entire scholarship from her income. Www statetaxforms The student loan is not tax-free educational assistance, so she does not need to reduce her qualified expenses by any part of the loan proceeds. Www statetaxforms Joan is treated as having paid $1,000 in qualified education expenses ($3,000 tuition – $2,000 scholarship). Www statetaxforms Example 2. Www statetaxforms The facts are the same as in Example 1, except that Joan reports her entire scholarship as income on her tax return. Www statetaxforms Because Joan reported the entire $2,000 scholarship in her income, she does not need to reduce her qualified education expenses. Www statetaxforms Joan is treated as having paid $3,000 in qualified education expenses. Www statetaxforms Coordination with Pell grants and other scholarships. Www statetaxforms   In some cases, you may be able to reduce your tax liability by including scholarships in income. Www statetaxforms If you are claiming an education credit for a claimed dependent who received a scholarship, you may be able to reduce your tax liability if the student includes the scholarship in income. Www statetaxforms The scholarship must be one that may (by its terms) be applied to expenses (such as room and board) other than qualified education expenses. Www statetaxforms Example 1—No scholarship. Www statetaxforms Bill Pass, age 28 and unmarried, enrolled full-time in 2013 as a first-year student at a local college to earn a degree in law enforcement. Www statetaxforms This was his first year of postsecondary education. Www statetaxforms During 2013, he paid $5,600 for his qualified education expenses and $4,400 for his room and board for the fall 2013 semester. Www statetaxforms He and the college meet all the requirements for the American opportunity credit. Www statetaxforms Bill's AGI and his MAGI, for purposes of figuring his credit, are $30,000. Www statetaxforms Bill takes the standard deduction of $5,950 and personal exemption of $3,800, reducing his AGI to taxable income of $20,250. Www statetaxforms His income tax liability, before credits, is $2,599 and Bill claims no credits other than the American opportunity credit. Www statetaxforms He figures his American opportunity credit based on qualified education expenses of $4,000, which results in a credit of $2,500 and tax after credits of $99. Www statetaxforms Example 2—Scholarship excluded from income. Www statetaxforms The facts are the same as in Example 1—No scholarship, except that Bill was awarded a $5,600 scholarship. Www statetaxforms Under the terms of his scholarship, it may be used to pay any educational expenses, including room and board. Www statetaxforms If Bill excludes the scholarship from income, he will be deemed (for purposes of computing his education credit) to have used the scholarship to pay for tuition, required fees, and course materials. Www statetaxforms His adjusted qualified education expenses will be zero and he will not have an education credit. Www statetaxforms Therefore, Bill's tax after credits would be $2,599. Www statetaxforms Example 3—Scholarship partially included in income. Www statetaxforms The facts are the same as in Example 2—Scholarship excluded from income. Www statetaxforms If, unlike Example 2, Bill includes $4,000 of the scholarship in income, he will be deemed to have used that amount to pay for room and board. Www statetaxforms The remaining $1,600 of the $5,600 scholarship will reduce his qualified education expenses and his adjusted qualified education expenses will be $4,000. Www statetaxforms Bill's AGI will increase to $34,000, his taxable income will increase to $24,250, and his tax before credits will increase to $3,199. Www statetaxforms Based on his adjusted qualified education expenses of $4,000, Bill would be able to claim an American opportunity tax credit of $2,500 and his tax after credits would be $699. Www statetaxforms Expenses That Do Not Qualify Qualified education expenses do not include amounts paid for: Insurance, Medical expenses (including student health fees), Room and board, Transportation, or Similar personal, living, or family expenses. Www statetaxforms This is true even if the amount must be paid to the institution as a condition of enrollment or attendance. Www statetaxforms Sports, games, hobbies, and noncredit courses. Www statetaxforms   Qualified education expenses generally do not include expenses that relate to any course of instruction or other education that involves sports, games or hobbies, or any noncredit course. Www statetaxforms However, if the course of instruction or other education is part of the student's degree program, these expenses can qualify. Www statetaxforms Comprehensive or bundled fees. Www statetaxforms   Some eligible educational institutions combine all of their fees for an academic period into one amount. Www statetaxforms If you do not receive or do not have access to an allocation showing how much you paid for qualified education expenses and how much you paid for personal expenses, such as those listed earlier, contact the institution. Www statetaxforms The institution is required to make this allocation and provide you with the amount you paid (or were billed) for qualified education expenses on Form 1098-T, Tuition Statement. Www statetaxforms See Figuring the Credit , later, for more information about Form 1098-T. Www statetaxforms Who Is an Eligible Student To claim the American opportunity credit, the student for whom you pay qualified education expenses must be an eligible student. Www statetaxforms This is a student who meets all of the following requirements. Www statetaxforms The student did not have expenses that were used to figure an American opportunity credit in any 4 earlier tax years. Www statetaxforms This includes any tax year(s) in which you claimed the Hope Scholarship Credit for the same student. Www statetaxforms The student had not completed the first 4 years of postsecondary education (generally, the freshman, sophomore, junior, and senior years of college) before 2013. Www statetaxforms For at least one academic period beginning in 2013, the student was enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential. Www statetaxforms The student has not been convicted of any federal or state felony for possessing or distributing a controlled substance as of the end of 2013. Www statetaxforms These requirements are also shown in Figure 2-2, Who is an Eligible Student for the American Opportunity Credit , later. Www statetaxforms Completion of first 4 years. Www statetaxforms   A student has completed the first 4 years of postsecondary education if the institution at which the student is enrolled awards the student 4 years of academic credit at that institution for coursework completed by the student before 2013. Www statetaxforms This student generally would not be an eligible student for purposes of the American opportunity credit. Www statetaxforms Exception. Www statetaxforms   Any academic credit awarded solely on the basis of the student's performance on proficiency examinations is disregarded in determining whether the student has completed 4 years of postsecondary education. Www statetaxforms Enrolled at least half-time. Www statetaxforms   A student was enrolled at least half-time if the student was taking at least half the normal full-time work load for his or her course of study. Www statetaxforms   The standard for what is half of the normal full-time work load is determined by each eligible educational institution. Www statetaxforms However, the standard may not be lower than any of those established by the U. Www statetaxforms S. Www statetaxforms Department of Education under the Higher Education Act of 1965. Www statetaxforms Please click here for the text description of the image. Www statetaxforms Figure 2-2 Example 1. Www statetaxforms Mack graduated from high school in June 2012. Www statetaxforms In September, he enrolled in an undergraduate degree program at College U, and attended full-time for both the 2012 fall and 2013 spring semesters. Www statetaxforms For the 2013 fall semester, Mack was enrolled less than half-time. Www statetaxforms Because Mack was enrolled in an undergraduate degree program on at least a half-time basis for at least one academic period that began during 2012 and at least one academic period that began during 2013, he is an eligible student for tax years 2012 and 2013 (including the 2013 fall semester when he enrolled at College U on less than a half-time basis). Www statetaxforms Example 2. Www statetaxforms After taking classes at College V on a part-time basis for a few years, Shelly became a full-time student for the 2013 spring semester. Www statetaxforms College V classified Shelly as a second-semester senior (fourth year) for the 2013 spring semester and as a first-semester graduate student (fifth year) for the 2013 fall semester. Www statetaxforms Because College V did not classify Shelly as having completed the first 4 years of postsecondary education as of the beginning of 2013, Shelly is an eligible student for tax year 2013. Www statetaxforms Therefore, the qualified education expenses paid for the 2013 spring semester and the 2013 fall semester are taken into account in calculating the American opportunity credit for 2013. Www statetaxforms Example 3. Www statetaxforms During the 2012 fall semester, Larry was a high school student who took classes on a half-time basis at College X. Www statetaxforms Larry was not enrolled as part of a degree program at College X because College X only admits students to a degree program if they have a high school diploma or equivalent. Www statetaxforms Because Larry was not enrolled in a degree program at College X during 2012, Larry was not an eligible student for tax year 2012. Www statetaxforms Example 4. Www statetaxforms The facts are the same as in Example 3. Www statetaxforms During the 2013 spring semester, Larry again attended College X but not as part of a degree program. Www statetaxforms Larry graduated from high school in June 2013. Www statetaxforms For the 2013 fall semester, Larry enrolled as a full-time student in College X as part of a degree program, and College X awarded Larry credit for his prior coursework at College X. Www statetaxforms Because Larry was enrolled in a degree program at College X for the 2013 fall term on at least a half-time basis, Larry is an eligible student for all of tax year 2013. Www statetaxforms Therefore, the qualified education expenses paid for classes taken at College X during both the 2013 spring semester (during which Larry was not enrolled in a degree program) and the 2013 fall semester are taken into account in computing any American opportunity credit. Www statetaxforms Example 5. Www statetaxforms Dee graduated from high school in June 2012. Www statetaxforms In January 2013, Dee enrolled in a 1-year postsecondary certificate program on a full-time basis to obtain a certificate as a travel agent. Www statetaxforms Dee completed the program in December 2013, and was awarded a certificate. Www statetaxforms In January 2014, she enrolled in a 1-year postsecondary certificate program on a full-time basis to obtain a certificate as a computer programmer. Www statetaxforms Dee is an eligible student for both tax years 2013 and 2014 because she meets the degree requirement, the work load requirement, and the year of study requirement for those years. Www statetaxforms Who Can Claim a Dependent's Expenses If there are qualified education expenses for your dependent during a tax year, either you or your dependent, but not both of you, can claim an American opportunity credit for your dependent's expenses for that year. Www statetaxforms For you to claim an American opportunity credit for your dependent's expenses, you must also claim an exemption for your dependent. Www statetaxforms You do this by listing your dependent's name and other required information on Form 1040 (or Form 1040A), line 6c. Www statetaxforms IF you. Www statetaxforms . Www statetaxforms . Www statetaxforms THEN only. Www statetaxforms . Www statetaxforms . Www statetaxforms claim an exemption on  your tax return for a  dependent who is an  eligible student you can claim the American opportunity credit based on that dependent's expenses. Www statetaxforms The dependent cannot claim the credit. Www statetaxforms do not claim an exemption on your tax return for a dependent who is an eligible student (even if entitled to the exemption) the dependent can claim the American opportunity credit. Www statetaxforms You cannot claim the credit based on this dependent's expenses. Www statetaxforms Expenses paid by dependent. Www statetaxforms   If you claim an exemption on your tax return for an eligible student who is your dependent, treat any expenses paid (or deemed paid) by your dependent as if you had paid them. Www statetaxforms Include these expenses when figuring the amount of your American opportunity credit. Www statetaxforms    Qualified education expenses paid directly to an eligible educational institution for your dependent under a court-approved divorce decree are treated as paid by your dependent. Www statetaxforms Expenses paid by you. Www statetaxforms   If you claim an exemption for a dependent who is an eligible student, only you can include any expenses you paid when figuring the amount of the American opportunity credit. Www statetaxforms If neither you nor anyone else claims an exemption for the dependent, only the dependent can include any expenses you paid when figuring the American opportunity credit. Www statetaxforms Expenses paid by others. Www statetaxforms   Someone other than you, your spouse, or your dependent (such as a relative or former spouse) may make a payment directly to an eligible educational institution to pay for an eligible student's qualified education expenses. Www statetaxforms In this case, the student is treated as receiving the payment from the other person and, in turn, paying the institution. Www statetaxforms If you claim an exemption on your tax return for the student, you are considered to have paid the expenses. Www statetaxforms Example. Www statetaxforms In 2013, Ms. Www statetaxforms Allen makes a payment directly to an eligible educational institution for her grandson Todd's qualified education expenses. Www statetaxforms For purposes of claiming an American opportunity credit, Todd is treated as receiving the money from his grandmother and, in turn, paying his qualified education expenses himself. Www statetaxforms Unless an exemption for Todd is claimed on someone else's 2013 tax return, only Todd can use the payment to claim an American opportunity credit. Www statetaxforms If anyone, such as Todd's parents, claims an exemption for Todd on his or her 2013 tax return, whoever claims the exemption may be able to use the expenses to claim an American opportunity credit. Www statetaxforms If anyone else claims an exemption for Todd, Todd cannot claim an American opportunity credit. Www statetaxforms Tuition reduction. Www statetaxforms    When an eligible educational institution provides a reduction in tuition to an employee of the institution (or spouse or dependent child of an employee), the amount of the reduction may or may not be taxable. Www statetaxforms If it is taxable, the employee is treated as receiving a payment of that amount and, in turn, paying it to the educational institution on behalf of the student. Www statetaxforms For more information on tuition reductions, see Qualified Tuition Reduction in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. Www statetaxforms Figuring the Credit The amount of the American opportunity credit (per eligible student) is the sum of: 100% of the first $2,000 of qualified education expenses you paid for the eligible student, and 25% of the next $2,000 of qualified education expenses you paid for that student. Www statetaxforms The maximum amount of American opportunity credit you can claim in 2013 is $2,500 multiplied by the number of eligible students. Www statetaxforms You can claim the full $2,500 for each eligible student for whom you paid at least $4,000 of adjusted qualified education expenses. Www statetaxforms However, the credit may be reduced based on your MAGI. Www statetaxforms See Effect of the Amount of Your Income on the Amount of Your Credit , later. Www statetaxforms Example. Www statetaxforms Jack and Kay Ford are married and file a joint tax return. Www statetaxforms For 2013, they claim an exemption for their dependent daughter on their tax return. Www statetaxforms Their MAGI is $70,000. Www statetaxforms Their daughter is in her junior (third) year of studies at the local university. Www statetaxforms Jack and Kay paid qualified education expenses of $4,300 in 2013. Www statetaxforms Jack and Kay, their daughter, and the local university meet all of the requirements for the American opportunity credit. Www statetaxforms Jack and Kay can claim a $2,500 American opportunity credit in 2013. Www statetaxforms This is 100% of the first $2,000 of qualified education expenses, plus 25% of the next $2,000. Www statetaxforms Form 1098-T. Www statetaxforms   To help you figure your American opportunity credit, the student should receive Form 1098-T, Tuition Statement. Www statetaxforms Generally, an eligible educational institution (such as a college or university) must send Form 1098-T (or acceptable substitute) to each enrolled student by January 31, 2014. Www statetaxforms An institution may choose to report either payments received (box 1), or amounts billed (box 2), for qualified education expenses. Www statetaxforms However, the amounts in boxes 1 and 2 of Form 1098-T might be different than what you paid. Www statetaxforms When figuring the credit, use only the amounts you paid or are deemed to have paid in 2013 for qualified education expenses. Www statetaxforms   In addition, Form 1098-T should give other information for that institution, such as adjustments made for prior years, the amount of scholarships or grants, reimbursements or refunds, and whether the student was enrolled at least half-time or was a graduate student. Www statetaxforms    The eligible educational institution may ask for a completed Form W-9S, Request for Student's or Borrower's Taxpayer Identification Number and Certification, or similar statement to obtain the student's name, address, and taxpayer identification number. Www statetaxforms Effect of the Amount of Your Income on the Amount of Your Credit The amount of your American opportunity credit is phased out (gradually reduced) if your MAGI is between $80,000 and $90,000 ($160,000 and $180,000 if you file a joint return). Www statetaxforms You cannot claim an American opportunity credit if your MAGI is $90,000 or more ($180,000 or more if you file a joint return). Www statetaxforms Modified adjusted gross income (MAGI). Www statetaxforms   For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return. Www statetaxforms MAGI when using Form 1040A. Www statetaxforms   If you file Form 1040A, your MAGI is the AGI on line 22 of that form. Www statetaxforms MAGI when using Form 1040. Www statetaxforms   If you file Form 1040, your MAGI is the AGI on line 38 of that form, modified by adding back any: Foreign earned income exclusion, Foreign housing exclusion, Foreign housing deduction, Exclusion of income by bona fide residents of American Samoa, and Exclusion of income by bona fide residents of Puerto Rico. Www statetaxforms You can use Worksheet 2-1, next, to figure your MAGI. Www statetaxforms    Worksheet 2-1. Www statetaxforms MAGI for the American Opportunity Credit 1. Www statetaxforms Enter your adjusted gross income  (Form 1040, line 38)   1. Www statetaxforms   2. Www statetaxforms Enter your foreign earned income exclusion and/or housing exclusion (Form 2555, line 45, or Form 2555-EZ, line 18)   2. Www statetaxforms       3. Www statetaxforms Enter your foreign housing deduction (Form 2555, line 50)   3. Www statetaxforms       4. Www statetaxforms Enter the amount of income from Puerto Rico you are excluding   4. Www statetaxforms       5. Www statetaxforms Enter the amount of income from American Samoa you are excluding (Form 4563, line 15)   5. Www statetaxforms       6. Www statetaxforms Add the amounts on lines 2, 3, 4, and 5   6. Www statetaxforms   7. Www statetaxforms Add the amounts on lines 1 and 6. Www statetaxforms  This is your modified adjusted  gross income. Www statetaxforms Enter here and  on Form 8863, line 3   7. Www statetaxforms   Phaseout. Www statetaxforms   If your MAGI is within the range of incomes where the credit must be reduced, you will figure your reduced credit using lines 2-7, of Form 8863, Part I. Www statetaxforms The same method is shown in the following example. Www statetaxforms Example. Www statetaxforms You are filing a joint return and your MAGI is $165,000. Www statetaxforms In 2013, you paid $5,000 of qualified education expenses. Www statetaxforms You figure a tentative American opportunity credit of $2,500 (100% of the first $2,000 of qualified education expenses, plus 25% of the next $2,000 of qualified education expenses). Www statetaxforms Because your MAGI is within the range of incomes where the credit must be reduced, you must multiply your tentative credit ($2,500) by a fraction. Www statetaxforms The numerator of the fraction is $180,000 (the upper limit for those filing a joint return) minus your MAGI. Www statetaxforms The denominator is $20,000, the range of incomes for the phaseout ($160,000 to $180,000). Www statetaxforms The result is the amount of your phased out (reduced) American opportunity credit ($1,875). Www statetaxforms      $2,500 × $180,000 − $165,000  $20,000 = $1,875   Refundable Part of Credit Forty percent of the American opportunity credit is refundable for most taxpayers. Www statetaxforms However, if you were under age 24 at the end of 2013 and the conditions listed below apply to you, you cannot claim any part of the American opportunity credit as a refundable credit on your tax return. Www statetaxforms Instead, your allowed credit (figured on Form 8863, Part II) will be used to reduce your tax as a nonrefundable credit only. Www statetaxforms You do not qualify for a refund if items 1 (a, b, or c), 2, and 3 below apply to you. Www statetaxforms You were: Under age 18 at the end of 2013, or Age 18 at the end of 2013 and your earned income (defined below) was less than one-half of your support (defined below), or Over age 18 and under age 24 at the end of 2013 and a full-time student (defined below) and your earned income (defined below) was less than one-half of your support (defined below). Www statetaxforms At least one of your parents was alive at the end of 2013. Www statetaxforms You are filing a return as single, head of household, qualifying widow(er), or married filing separately for 2013. Www statetaxforms Earned income. Www statetaxforms   Earned income includes wages, salaries, professional fees, and other payments received for personal services actually performed. Www statetaxforms Earned income includes the part of any scholarship or fellowship that represents payment for teaching, research, or other services performed by the student that are required as a condition for receiving the scholarship or fellowship. Www statetaxforms Earned income does not include that part of the compensation for personal services rendered to a corporation which represents a distribution of earnings or profits rather than a reasonable allowance as compensation for the personal services actually rendered. Www statetaxforms   If you are a sole proprietor or a partner in a trade or business in which both personal services and capital are material income-producing factors, earned income also includes a reasonable allowance for compensation for personal services, but not more than 30% of your share of the net profits from that trade or business (after subtracting the deduction for one-half of self-employment tax). Www statetaxforms However, if capital is not an income-producing factor and your personal services produced the business income, the 30% limit does not apply. Www statetaxforms Support. Www statetaxforms   Your support includes food, shelter, clothing, medical and dental care, education, and the like. Www statetaxforms Generally, the amount of the item of support will be the amount of expenses incurred by the one furnishing such item. Www statetaxforms If the item of support is in the form of property or lodging, measure the amount of such item of support by its fair market value. Www statetaxforms However, a scholarship received by you is not considered support if you are a full-time student. Www statetaxforms See Publication 501 for details. Www statetaxforms Full-time student. Www statetaxforms   You are a full-time student for 2013 if during any part of any 5 calendar months during the year you were enrolled as a full-time student at an eligible educational institution (defined earlier), or took a full-time, on-farm training course given by such an institution or by a state, county, or local government agency. Www statetaxforms Claiming the Credit You claim the American opportunity credit by completing Form 8863 and submitting it with your Form 1040 or 1040A. Www statetaxforms Enter the nonrefundable part of the credit on Form 1040, line 49, or on Form 1040A, line 31. Www statetaxforms Enter the refundable part of the credit on Form 1040, line 66, or on Form 1040A, line 40. Www statetaxforms A filled-in Form 8863 is shown at the end of this publication. Www statetaxforms Note. Www statetaxforms In Appendix A. Www statetaxforms at the end of this publication, there is an example illustrating the use of Form 8863 when both the American opportunity credit and the lifetime learning credit are claimed on the same tax return. Www statetaxforms Prev  Up  Next   Home   More Online Publications
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Www statetaxforms 1. Www statetaxforms   Tax Withholding for 2014 Table of Contents Introduction Useful Items - You may want to see: Salaries and WagesDetermining Amount of Tax Withheld Using Form W-4 Completing Form W-4 and Worksheets Getting the Right Amount of Tax Withheld Rules Your Employer Must Follow Exemption From Withholding Supplemental Wages Penalties Tips Taxable Fringe BenefitsSpecial rule. Www statetaxforms Exceptions. Www statetaxforms Sick Pay Pensions and AnnuitiesPeriodic Payments Nonperiodic Payments Eligible Rollover Distributions Choosing Not To Have Income Tax Withheld Gambling WinningsException. Www statetaxforms Identical wagers. Www statetaxforms Unemployment Compensation Federal Payments Backup WithholdingTaxpayer identification number. Www statetaxforms Underreported interest or dividends. Www statetaxforms Introduction This chapter discusses income tax withholding on: Salaries and wages, Tips, Taxable fringe benefits, Sick pay, Pensions and annuities, Gambling winnings, Unemployment compensation, and Certain federal payments. Www statetaxforms This chapter explains in detail the rules for withholding tax from each of these types of income. Www statetaxforms The discussion of salaries and wages includes an explanation of how to complete Form W-4. Www statetaxforms This chapter also covers backup withholding on interest, dividends, and other payments. Www statetaxforms Useful Items - You may want to see: Form (and Instructions) W-4 Employee's Withholding Allowance Certificate W-4P Withholding Certificate for Pension or Annuity Payments W-4S Request for Federal Income Tax Withholding From Sick Pay W-4V Voluntary Withholding Request See chapter 5 of this publication for information about getting these publications and forms. Www statetaxforms Salaries and Wages Income tax is withheld from the pay of most employees. Www statetaxforms Your pay includes your regular pay, bonuses, commissions, and vacation allowances. Www statetaxforms It also includes reimbursements and other expense allowances paid under a nonaccountable plan. Www statetaxforms See Supplemental Wages , later, for definitions of accountable and nonaccountable plans. Www statetaxforms If your income is low enough that you will not have to pay income tax for the year, you may be exempt from withholding. Www statetaxforms This is explained under Exemption From Withholding , later. Www statetaxforms You can ask your employer to withhold income tax from noncash wages and other wages not subject to withholding. Www statetaxforms If your employer does not agree to withhold tax, or if not enough is withheld, you may have to pay estimated tax, as discussed in chapter 2. Www statetaxforms Military retirees. Www statetaxforms   Military retirement pay is treated in the same manner as regular pay for income tax withholding purposes, even though it is treated as a pension or annuity for other tax purposes. Www statetaxforms Household workers. Www statetaxforms   If you are a household worker, you can ask your employer to withhold income tax from your pay. Www statetaxforms A household worker is an employee who performs household work in a private home, local college club, or local fraternity or sorority chapter. Www statetaxforms   Tax is withheld only if you want it withheld and your employer agrees to withhold it. Www statetaxforms If you do not have enough income tax withheld, you may have to pay estimated tax, as discussed in chapter 2. Www statetaxforms Farmworkers. Www statetaxforms   Generally, income tax is withheld from your cash wages for work on a farm unless your employer both: Pays you cash wages of less than $150 during the year, and Has expenditures for agricultural labor totaling less than $2,500 during the year. Www statetaxforms Differential wage payments. Www statetaxforms   When employees are on leave from employment for military duty, some employers make up the difference between the military pay and civilian pay. Www statetaxforms Payments to an employee who is on active duty for a period of more than 30 days will be subject to income tax withholding, but not subject to social security or Medicare taxes. Www statetaxforms The wages and withholding will be reported on Form W-2, Wage and Tax Statement. Www statetaxforms Determining Amount of Tax Withheld Using Form W-4 The amount of income tax your employer withholds from your regular pay depends on two things. Www statetaxforms The amount you earn in each payroll period. Www statetaxforms The information you give your employer on Form W-4. Www statetaxforms Form W-4 includes four types of information that your employer will use to figure your withholding. Www statetaxforms Whether to withhold at the single rate or at the lower married rate. Www statetaxforms How many withholding allowances you claim (each allowance reduces the amount withheld). Www statetaxforms Whether you want an additional amount withheld. Www statetaxforms Whether you are claiming an exemption from withholding in 2014. Www statetaxforms See Exemption From Withholding , later. Www statetaxforms Note. Www statetaxforms You must specify a filing status and a number of withholding allowances on Form W-4. Www statetaxforms You cannot specify only a dollar amount of withholding. Www statetaxforms New Job When you start a new job, you must fill out a Form W-4 and give it to your employer. Www statetaxforms Your employer should have copies of the form. Www statetaxforms If you need to change the information later, you must fill out a new form. Www statetaxforms If you work only part of the year (for example, you start working after the beginning of the year), too much tax may be withheld. Www statetaxforms You may be able to avoid overwithholding if your employer agrees to use the part-year method. Www statetaxforms See Part-Year Method , later, for more information. Www statetaxforms Employee also receiving pension income. Www statetaxforms   If you receive pension or annuity income and begin a new job, you will need to file Form W-4 with your new employer. Www statetaxforms However, you can choose to split your withholding allowances between your pension and job in any manner. Www statetaxforms Changing Your Withholding During the year changes may occur to your marital status, exemptions, adjustments, deductions, or credits you expect to claim on your tax return. Www statetaxforms When this happens, you may need to give your employer a new Form W-4 to change your withholding status or number of allowances. Www statetaxforms If the changes reduce the number of allowances you are allowed to claim or changes your marital status from married to single, you must give your employer a new Form W-4 within 10 days. Www statetaxforms See Marital Status (Line 3 of Form W-4) and Withholding Allowances (Line 5 of Form W-4) , later. Www statetaxforms Generally, you can submit a new Form W-4 whenever you wish to change your withholding allowances for any other reason. Www statetaxforms See Table 1-1 for examples of personal and financial changes you should consider. Www statetaxforms Table 1-1. Www statetaxforms Personal and Financial Changes Factor Examples Lifestyle change Marriage Divorce Birth or adoption of child Loss of an exemption Purchase of a new home Retirement Filing chapter 11 bankruptcy Wage income You or your spouse start or stop working, or start or stop a second job Change in the amount of taxable income not subject to withholding Interest income Dividends Capital gains Self-employment income IRA (including certain Roth  IRA) distributions Change in the amount of adjustments to income IRA deduction Student loan interest deduction Alimony expense Change in the amount of itemized deductions or tax credits Medical expenses Taxes Interest expense Gifts to charity Job expenses Dependent care expenses Education credit Child tax credit Earned income credit If you change the number of your withholding allowances, you can request that your employer withhold using the Cumulative Wage Method , explained later. Www statetaxforms Checking Your Withholding After you have given your employer a Form W-4, you can check to see whether the amount of tax withheld from your pay is too much or too little. Www statetaxforms If too much or too little tax is being withheld, you should give your employer a new Form W-4 to change your withholding. Www statetaxforms You can get a blank Form W-4 from your employer or print the form from IRS. Www statetaxforms gov. Www statetaxforms You should try to have your withholding match your actual tax liability. Www statetaxforms If not enough tax is withheld, you will owe tax at the end of the year and may have to pay interest and a penalty. Www statetaxforms If too much tax is withheld, you will lose the use of that money until you get your refund. Www statetaxforms Always check your withholding if there are personal or financial changes in your life or changes in the law that might change your tax liability. Www statetaxforms See Table 1-1 for examples. Www statetaxforms Note. Www statetaxforms You cannot give your employer a payment to cover federal income tax withholding on salaries and wages for past pay periods or a payment for estimated tax. Www statetaxforms When Should You Check Your Withholding? The earlier in the year you check your withholding, the easier it is to get the right amount of tax withheld. Www statetaxforms You should check your withholding when any of the following situations occur. Www statetaxforms You receive a paycheck stub (statement) covering a full pay period in 2014, showing tax withheld based on 2014 tax rates. Www statetaxforms You prepare your 2013 tax return and get a: Big refund, or Balance due that is: More than you can comfortably pay, or Subject to a penalty. Www statetaxforms There are changes in your life or financial situation that affect your tax liability. Www statetaxforms See Table 1-1. Www statetaxforms There are changes in the tax law that affect your tax liability. Www statetaxforms How Do You Check Your Withholding? You can use the worksheets and tables in this publication to see if you are having the right amount of tax withheld. Www statetaxforms You can also use the IRS Withholding calculator at www. Www statetaxforms irs. Www statetaxforms gov/individuals. Www statetaxforms If you use the worksheets and tables in this publication, follow these steps. Www statetaxforms Fill out Worksheet 1-5 to project your total federal income tax liability for 2014. Www statetaxforms Fill out Worksheet 1-7 to project your total federal withholding for 2014 and compare that with your projected tax liability from Worksheet 1-5. Www statetaxforms If you are not having enough tax withheld, line 6 of Worksheet 1-7 will show you how much more to have withheld each payday. Www statetaxforms For ways to increase the amount of tax withheld, see How Do You Increase Your Withholding? If line 5 of Worksheet 1-7 shows that you are having more tax withheld than necessary, see How Do You Decrease Your Withholding, for ways to decrease the amount of tax you have withheld each payday. Www statetaxforms How Do You Increase Your Withholding? There are two ways to increase your withholding. Www statetaxforms You can: Decrease the number of allowances you claim on Form W-4, or Enter an additional amount that you want withheld from each paycheck on Form W-4. Www statetaxforms Requesting an additional amount withheld. Www statetaxforms   You can request that an additional amount be withheld from each paycheck by following these steps. Www statetaxforms Complete Worksheets 1-5 and 1-7. Www statetaxforms Complete a new Form W-4 if the amount on Worksheet 1-7, line 5: Is more than you want to pay with your tax return or in estimated tax payments throughout the year, or Would cause you to pay a penalty when you file your tax return for 2014. Www statetaxforms Enter on your new Form W-4, the same number of withholding allowances your employer now uses for your withholding. Www statetaxforms This is the number of allowances you entered on the last Form W-4 you gave your employer. Www statetaxforms Enter on your new Form W-4, the amount from Worksheet 1-7, line 6. Www statetaxforms Give your newly completed Form W-4 to your employer. Www statetaxforms   If you have this additional amount withheld from your pay each payday, you should avoid owing a large amount at the end of the year. Www statetaxforms Example. Www statetaxforms Early in 2014, Steve Miller used Worksheets 1-5, 1-6, and 1-7 to project his 2014 tax liability ($4,316) and his withholding for the year ($3,516). Www statetaxforms Steve's tax will be underwithheld by $800 ($4,316 − $3,516). Www statetaxforms His choices are to pay this amount when he files his 2014 tax return, make estimated tax payments, or increase his withholding now. Www statetaxforms Steve gets a new Form W-4 from his employer, who tells him that there are 50 paydays remaining in 2014. Www statetaxforms Steve completes the new Form W-4 as before, entering the same number of withholding allowances as before, but, in addition, entering $16 ($800 ÷ 50) on the form as the additional amount to be withheld from his pay each payday. Www statetaxforms He gives the completed form to his employer. Www statetaxforms What if I have more than one job or my spouse also has a job?   You are more likely to need to increase your withholding if you have more than one job or if you are married filing jointly and your spouse also works. Www statetaxforms If this is the case, you can increase your withholding for one or more of the jobs. Www statetaxforms   You can apply the amount on Worksheet 1-7, line 5, to only one job or divide it between the jobs any way you wish. Www statetaxforms For each job, determine the extra amount that you want to apply to that job and divide that amount by the number of paydays remaining in 2014 for that job. Www statetaxforms This will give you the additional amount to enter on the Form W-4 you will file for that job. Www statetaxforms You need to give your employer a new Form W-4 for each job for which you are changing your withholding. Www statetaxforms Example. Www statetaxforms Meg Green works in a store and earns $46,000 a year. Www statetaxforms Her husband, John, works full-time in manufacturing and earns $68,000 a year. Www statetaxforms In 2014, they will also have $184 in taxable interest and $1,000 of other taxable income. Www statetaxforms They expect to file a joint income tax return. Www statetaxforms Meg and John complete Worksheets 1-5, 1-6, and 1-7. Www statetaxforms Line 5 of Worksheet 1-7 shows that they will owe an additional $4,459 after subtracting their withholding for the year. Www statetaxforms They can divide the $4,459 any way they want. Www statetaxforms They can enter an additional amount on either of their Forms W-4, or divide it between them. Www statetaxforms They decide to have the additional amount withheld from John's wages, so they enter $91 ($4,459 ÷ 49 remaining paydays) on his Form W-4. Www statetaxforms Both claim the same number of allowances as before. Www statetaxforms How Do You Decrease Your Withholding? If your completed Worksheets 1-5 and 1-7 show that you may have more tax withheld than your projected tax liability for 2014, you may be able to decrease your withholding. Www statetaxforms There are two ways to do this. Www statetaxforms You can: Decrease any additional amount you are having withheld, or Increase the number of allowances you claim on Form W-4. Www statetaxforms You can claim only the number of allowances to which you are entitled. Www statetaxforms To see if you can decrease your withholding by increasing your allowances, see the Form W-4 instructions and the rest of this publication. Www statetaxforms Increasing the number of allowances. Www statetaxforms   Figure and increase the number of withholding allowances you can claim as follows. Www statetaxforms On a new Form W-4, complete the Personal Allowances Worksheet. Www statetaxforms If you plan to itemize deductions, claim adjustments to income, or claim tax credits, complete a new Deductions and Adjustments Worksheet. Www statetaxforms If you plan to claim tax credits, see Converting Credits to Withholding Allowances, later. Www statetaxforms If you meet the criteria on line H of the Form W-4 Personal Allowances Worksheet, complete a new Two-Earners/Multiple Jobs Worksheet. Www statetaxforms If the number of allowances you can claim on Form W-4, is different from the number you already are claiming, give the newly completed Form W-4 to your employer. Www statetaxforms Converting Credits to Withholding Allowances Table 1-2 , later, shows many of the tax credits you may be able to use to decrease your withholding. Www statetaxforms The Form W-4 Personal Allowances Worksheet provides only rough adjustments for the child and dependent care credit and the child tax credit. Www statetaxforms Complete Worksheet 1-8 to figure these credits more accurately and also take other credits into account. Www statetaxforms Include the amount from line 12 of Worksheet 1-8 in the total on line 5 of the Deductions and Adjustments Worksheet. Www statetaxforms Then complete the Deductions and Adjustments Worksheet and the rest of Form W-4. Www statetaxforms If you take the child and dependent care credit into account on Worksheet 1-8, enter -0- on line F of the Personal Allowances Worksheet. Www statetaxforms If you take the child tax credit into account on Worksheet 1-8, enter -0- on line G of the Personal Allowances Worksheet. Www statetaxforms Example. Www statetaxforms Brett and Alyssa Davis are married and expect to file a joint return for 2014. Www statetaxforms Their expected taxable income from all sources is $68,000. Www statetaxforms They expect to have $15,900 of itemized deductions. Www statetaxforms Their projected tax credits include a child and dependent care credit of $960 and an adoption credit of $1,500. Www statetaxforms The Davis' complete Worksheet 1-8, as follows, to see whether they can convert their tax credits into additional withholding allowances. Www statetaxforms Line 1, expected child and dependent care credit—$960. Www statetaxforms Line 9, expected adoption credit—$1,500. Www statetaxforms Line 10, total estimated tax credits—$2,460. Www statetaxforms Line 11. Www statetaxforms Their combined total income from all sources, $68,000, falls between $42,001 and $98,000 on the table for married filing jointly or qualifying widow(er). Www statetaxforms The number to the right of this range is 6. Www statetaxforms 7. Www statetaxforms Line 12, multiply line 10 by line 11—$16,482. Www statetaxforms Then the Davis' complete the Form W-4 worksheets. Www statetaxforms Because they choose to account for their child and dependent care credit on the Deductions and Adjustments Worksheet, they enter -0- on line F of the Personal Allowances Worksheet and figure a new total for line H. Www statetaxforms They take the result on line 12 of Worksheet 1-8, add it to their other adjustments on line 5 of the Form W-4 Deductions and Adjustments Worksheet, and complete the Form W-4 worksheets. Www statetaxforms When Will Your New Form W-4 Go Into Effect? If the change is for the current year, your employer must put your new Form W-4 into effect no later than the start of the first payroll period ending on or after the 30th day after the day on which you give your employer your revised Form W-4. Www statetaxforms If the change is for next year, your new Form W-4 will not take effect until next year. Www statetaxforms Retirees Returning to the Workforce When you first began receiving your pension, you told the payer how much tax to withhold, if any, by completing Form W-4P, Withholding Certificate for Pension or Annuity Payments (or similar form). Www statetaxforms However, if your retirement pay is from the military or certain deferred compensation plans, you completed Form W-4 instead of Form W-4P. Www statetaxforms You completed either form based on your projected income at that time. Www statetaxforms Now that you are returning to the workforce, your new Form W-4 (given to your employer) and your Form W-4 or W-4P (on file with your pension plan) must work together to determine the correct amount of withholding for your new amount of income. Www statetaxforms The worksheets that come with Forms W-4 and W-4P are basically the same, so you can use either set of worksheets to figure out how many withholding allowances you are entitled to claim. Www statetaxforms Start off with the Personal Allowances Worksheet. Www statetaxforms Then, if you will be itemizing your deductions, claiming adjustments to income, or claiming tax credits when you file your tax return, complete the Deductions and Adjustments Worksheet. Www statetaxforms The third worksheet is the most important for this situation. Www statetaxforms Form W-4 calls it the Two-Earners/Multiple Jobs Worksheet, Form W-4P calls it the Multiple Pensions/More-Than-One-Income Worksheet—both are the same. Www statetaxforms If you have more than one source of income, in order to have enough withholding to cover the tax on your higher income, you may need to claim fewer withholding allowances or request your employer to withhold an additional amount from each paycheck. Www statetaxforms Once you have figured out how many allowances you are entitled to claim, look at the income from both your pension and your new job, and how often you receive payments. Www statetaxforms It is your decision how to divide up your withholding allowances between these sources of income. Www statetaxforms For example, you may want to “take home” most of your weekly paycheck to use as spending money and use your monthly pension to “pay the bills. Www statetaxforms ” In that case, change your Form W-4P to zero allowances and claim all that you are entitled to on your Form W-4. Www statetaxforms There are a couple of ways you can get a better idea of how much tax will be withheld when claiming a certain number of allowances. Www statetaxforms Use the withholding tables in Publication 15 (Circular E), Employer's Tax Guide. Www statetaxforms Contact your pension provider and your employer's payroll department. Www statetaxforms And remember, this is not a final decision. Www statetaxforms If you do not get the correct amount of withholding with the first Forms W-4 and W-4P you submit, you should refigure your allowances (or divide them differently) using the information and worksheets in this publication, or the resources mentioned above. Www statetaxforms You should go through this same process each time your life situation changes, whether it be for personal or financial reasons. Www statetaxforms You may need more tax withheld, or you may need less. Www statetaxforms Table 1-2. Www statetaxforms Tax Credits for 2014 For more information about the . Www statetaxforms . Www statetaxforms . Www statetaxforms See . Www statetaxforms . Www statetaxforms . Www statetaxforms Adoption credit Form 8839 instructions Child and dependent care expenses, credit for Publication 503, Child and Dependent Care Expenses Child tax credit (including the additional child tax credit) Instructions for Form 1040 or Form 1040A Earned income credit Publication 596, Earned Income Credit Education credits Publication 970, Tax Benefits for Education Elderly or the disabled, credit for the Publication 524, Credit for the Elderly or the Disabled Foreign tax credit (except any credit that applies to wages not subject to U. Www statetaxforms S. Www statetaxforms income tax withholding because they are subject to income tax withholding by a foreign country) Publication 514, Foreign Tax Credit for Individuals General business credit Form 3800, General Business Credit Mortgage interest credit Publication 530, Tax Information for First-Time Homeowners Qualified electric vehicle passive activity credit Form 8834 Prior year minimum tax, credit for (if you paid alternative minimum tax in an earlier year) Form 8801 instructions Retirement savings contributions credit (saver's credit) Publication 590, Individual Retirement Arrangements (IRAs) Tax credit bonds, credit to holders of Form 8912 instructions Completing Form W-4 and Worksheets When reading the following discussion, you may find it helpful to refer to Form W-4. Www statetaxforms Marital Status There is a lower withholding rate for people who qualify to check the “Married” box on line 3 of Form W-4. Www statetaxforms Everyone else must have tax withheld at the higher single rate. Www statetaxforms Single. Www statetaxforms   You must check the “Single” box if any of the following applies. Www statetaxforms You are single. Www statetaxforms If you are divorced, or separated from your spouse under a court decree of separate maintenance, you are considered single. Www statetaxforms You are married, but neither you nor your spouse is a citizen or resident of the United States. Www statetaxforms 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. Www statetaxforms For more information, see Nonresident Spouse Treated as a Resident in chapter 1 of Publication 519. Www statetaxforms Married. Www statetaxforms   You qualify to check the “Married” box if any of the following applies. Www statetaxforms You are married and neither you nor your spouse is a nonresident alien. Www statetaxforms You are considered married for the whole year even if your spouse died during the year. Www statetaxforms You are married and either you or your spouse is a nonresident alien who has chosen to be treated as a resident alien for tax purposes. Www statetaxforms For more information, see Nonresident Spouse Treated as a Resident in chapter 1 of Publication 519. Www statetaxforms You expect to be able to file your return as a qualifying widow or widower. Www statetaxforms 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 for the entire year that was the main home for you and your child whom you can claim as a dependent. Www statetaxforms 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. Www statetaxforms 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. Www statetaxforms Married, but withhold at higher single rate. Www statetaxforms   Some married people find that they do not have enough tax withheld at the married rate. Www statetaxforms This can happen, for example, when both spouses work. Www statetaxforms To avoid this, you can check the “Married, but withhold at higher Single rate” box (even if you qualify for the married rate). Www statetaxforms Also, you may find that more tax is withheld if you fill out the Two-Earners/Multiple Jobs Worksheet, explained later. Www statetaxforms Withholding Allowances The more allowances you claim on Form W-4, the less income tax your employer will withhold. Www statetaxforms You will have the most tax withheld if you claim “0” allowances. Www statetaxforms The number of allowances you can claim depends on the following factors. Www statetaxforms How many exemptions you can take on your tax return. Www statetaxforms Whether you have income from more than one job. Www statetaxforms What deductions, adjustments to income, and credits you expect to have for the year. Www statetaxforms Whether you will file as head of household. Www statetaxforms If you are married (filing jointly), it also depends on whether your spouse also works and claims any allowances on his or her own Form W-4. Www statetaxforms Or, if married filing separately, whether or not your spouse also works. Www statetaxforms Form W-4 worksheets. Www statetaxforms    Form W-4 has worksheets to help you figure how many withholding allowances you can claim. Www statetaxforms The worksheets are for your own records. Www statetaxforms Do not give them to your employer. Www statetaxforms   Complete only one set of Form W-4 worksheets, no matter how many jobs you have. Www statetaxforms 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 each must give Form W-4 to your employers. Www statetaxforms Complete separate sets of worksheets only if you and your spouse will file separate returns. Www statetaxforms   If you are not exempt from withholding (see Exemption From Withholding , later), complete the Personal Allowances Worksheet on page 1 of the form. Www statetaxforms 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. Www statetaxforms 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. Www statetaxforms   Complete all worksheets that apply to your situation. Www statetaxforms 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. Www statetaxforms Multiple jobs. Www statetaxforms   If you have income from more than one job at the same time, complete only one set of Form W-4 worksheets. Www statetaxforms Then split your allowances between the Forms W-4 for each job. Www statetaxforms You cannot claim the same allowances with more than one employer at the same time. Www statetaxforms You can claim all your allowances with one employer and none with the other(s), or divide them any other way. Www statetaxforms Married individuals. Www statetaxforms   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. Www statetaxforms Use only one set of worksheets. Www statetaxforms You can divide your total allowances any way, but you cannot claim an allowance that your spouse also claims. Www statetaxforms   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. Www statetaxforms Alternative method of figuring withholding allowances. Www statetaxforms   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. Www statetaxforms   The method you use must be based on withholding schedules, the tax rate schedules, and the 2014 Estimated Tax Worksheet in chapter 2. Www statetaxforms 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. Www statetaxforms   You can use the number of withholding allowances determined under an alternative method rather than the number determined using the Form W-4 worksheets. Www statetaxforms You still must give your employer a Form W-4 claiming your withholding allowances. Www statetaxforms Employees who are not citizens or residents. Www statetaxforms   If you are neither a citizen nor a resident of the United States, you usually can claim only one withholding allowance. Www statetaxforms However, this rule does not apply if you are a resident of Canada or Mexico, or if you are a U. Www statetaxforms S. Www statetaxforms national. Www statetaxforms It also does not apply if your spouse is a U. Www statetaxforms S. Www statetaxforms citizen or resident and you have chosen to be treated as a resident of the United States for tax purposes. Www statetaxforms Special rules apply to residents of South Korea and India. Www statetaxforms For more information, see Withholding From Compensation in chapter 8 of Publication 519. Www statetaxforms 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. Www statetaxforms Exemptions. Www statetaxforms Only one job. Www statetaxforms Head of household filing status. Www statetaxforms Child and dependent care credit. Www statetaxforms Child tax credit. Www statetaxforms Exemptions (worksheet lines A, C, and D). Www statetaxforms   You can claim one withholding allowance for each exemption you expect to claim on your tax return. Www statetaxforms Self. Www statetaxforms   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. Www statetaxforms 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. Www statetaxforms Spouse. Www statetaxforms   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. Www statetaxforms Do not claim this allowance if you and your spouse expect to file separate returns. Www statetaxforms Dependents. Www statetaxforms   You can claim one allowance on line D for each exemption you will claim for a dependent on your tax return. Www statetaxforms Only one job (worksheet line B). Www statetaxforms    You can claim an additional withholding allowance if any of the following apply for 2014. Www statetaxforms You are single and you have only one job at a time. Www statetaxforms You are married, you have only one job at a time, and your spouse does not work. Www statetaxforms Your wages from a second job or your spouse's wages (or the total of both) are $1,500 or less. Www statetaxforms If you qualify for this allowance, enter “1” on line B of the worksheet. Www statetaxforms Head of household filing status (worksheet line E). Www statetaxforms   Generally, 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 2014 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. Www statetaxforms For more information, see Publication 501. Www statetaxforms   If you expect to file as head of household on your 2014 tax return, enter “1” on line E of the worksheet. Www statetaxforms Reduction of personal allowances. Www statetaxforms   For 2014, your deduction for personal exemptions on your tax return is reduced if your adjusted gross income (AGI) is more than the AGI shown next for your filing status. Www statetaxforms Personal Allowance Phaseout Threshold Single $254,200 Married filing jointly or qualifying widow(er) $305,050 Married filing separately $152,525 Head of household $279,650   If you expect your AGI to be more than the amount listed, use Worksheet 1-1 to figure your reduced number of personal allowances on lines A, C, and D of the Personal Allowances Worksheet. Www statetaxforms Worksheet 1-1. Www statetaxforms Personal Allowances Worksheet (Form W-4) Reduction of Personal Allowances if AGI Above Phaseout Threshold 1. Www statetaxforms Enter the total amount of allowances on lines A, C, and D of the Personal Allowance Worksheet without regard to the phaseout rule 1. Www statetaxforms   2. Www statetaxforms Enter your expected AGI 2. Www statetaxforms       3. Www statetaxforms Enter $254,200 if single $305,050 if married filing jointly or qualifying widow(er) $152,525 if married filing separately $279,650 if head of household 3. Www statetaxforms       4. Www statetaxforms Subtract line 3 from line 2 4. Www statetaxforms       5. Www statetaxforms Divide line 4 by $125,000 ($62,500 if married filing separately). Www statetaxforms Enter the result as a decimal 5. Www statetaxforms   6. Www statetaxforms Multiply line 1 by line 5. Www statetaxforms If the result is not a whole number, increase it to the next higher whole number 6. Www statetaxforms   7. Www statetaxforms Subtract line 6 from line 1. Www statetaxforms The total of the numbers you enter on A, C, and D of the Personal Allowances Worksheet can not be more than this amount 7. Www statetaxforms     Child and dependent care credit (worksheet line F). Www statetaxforms   Enter “1” on line F if you expect to claim a credit for at least $2,000 of qualifying child or dependent care expenses on your 2014 return. Www statetaxforms 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. Www statetaxforms For more information, see Publication 503, Child and Dependent Care Expenses. Www statetaxforms   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 , later. Www statetaxforms Child tax credit (worksheet line G). Www statetaxforms   If your total income will be less than $65,000 ($95,000 if married), enter “2” on line G for each eligible child. Www statetaxforms Subtract “1” from that amount if you have three to six eligible children. Www statetaxforms Subtract “2” from that amount if you have seven or more eligible children. Www statetaxforms   If your total income will be between $65,000 and $84,000 ($95,000 and $119,000 if married), enter “1” on line G for each eligible child. Www statetaxforms   An eligible child is any child: Who is your son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, half brother, half sister, or a descendant of any of them (for example, your grandchild, niece, or nephew), Who will be under age 17 at the end of 2014, Who is younger than you (or your spouse if filing jointly) or permanently and totally disabled, Who will not provide over half of his or her own support for 2014, Who will not file a joint return, unless the return is filed only as a claim for refund, Who will live with you for more than half of 2014, Who is a U. Www statetaxforms S. Www statetaxforms citizen, U. Www statetaxforms S. Www statetaxforms national, or U. Www statetaxforms S. Www statetaxforms resident alien, and Who will be claimed as a dependent on your return. Www statetaxforms If you are a U. Www statetaxforms S. Www statetaxforms citizen or U. Www statetaxforms S. Www statetaxforms national and your adopted child lived with you all year as a member of your household, that child meets the citizenship test. Www statetaxforms   Also, if any other person can claim the child as an eligible child, see Qualifying child of more than one person in the 2013 instructions for Form 1040 or 1040A, line 6c. Www statetaxforms   For more information about the child tax credit, see the instructions for Form 1040 or Form 1040A. Www statetaxforms   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 , later. Www statetaxforms Total personal allowances (worksheet line H). Www statetaxforms    Add lines A through G and enter the total on line H. Www statetaxforms 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. Www statetaxforms Deductions and Adjustments Worksheet Use the Deductions and Adjustments Worksheet on page 2 of Form W-4 if you plan to itemize your deductions, claim certain credits, or claim adjustments to the income on your 2014 tax return and you want to reduce your withholding. Www statetaxforms Also, complete this worksheet when you have changes to those items to see if you need to change your withholding. Www statetaxforms Use the amount of each item you reasonably can expect to show on your return. Www statetaxforms However, do not use more than: The amount shown for that item on your 2013 return (or your 2012 return if you have not yet filed your 2013 return), plus Any additional amount related to a transaction or occurrence (such as payments already made, the signing of an agreement, or the sale of property) that you can prove has happened or will happen during 2013 or 2014. Www statetaxforms Do not include any amount shown on your last tax return that has been disallowed by the IRS. Www statetaxforms Example. Www statetaxforms On June 30, 2013, you bought your first home. Www statetaxforms On your 2013 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. Www statetaxforms Based on your mortgage payment schedule and your real estate tax assessment, you reasonably can expect to claim deductions of $13,200 for those items on your 2014 return. Www statetaxforms You can use $13,200 to figure the number of your withholding allowances for itemized deductions. Www statetaxforms Not itemizing deductions. Www statetaxforms   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. Www statetaxforms Itemized deductions (worksheet line 1). Www statetaxforms   Enter your estimated total itemized deductions on line 1 of the worksheet. Www statetaxforms   Listed below are some of the deductions you can take into account when figuring additional withholding allowances for 2014. Www statetaxforms You normally claim these deductions on Schedule A of Form 1040. Www statetaxforms Medical and dental expenses that are more than 10% (7. Www statetaxforms 5% if either you or your spouse was born before January 2, 1950) of your 2014 AGI (defined under AGI , later). Www statetaxforms State and local income or property taxes. Www statetaxforms Deductible home mortgage interest. Www statetaxforms Investment interest up to net investment income. Www statetaxforms Charitable contributions. Www statetaxforms Casualty and theft losses that are more than $100 and 10% of your AGI. Www statetaxforms Fully deductible miscellaneous itemized deductions, including: Impairment-related work expenses of persons with disabilities, Federal estate tax on income in respect of a decedent, 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, Unrecovered investments in an annuity contract under which payments have ceased because of the annuitant's death, Gambling losses up to the amount of gambling winnings reported on your return, and Casualty and theft losses from  income-producing property. Www statetaxforms Other miscellaneous itemized deductions that are more than 2% of your AGI, including: Unreimbursed employee business expenses, such as education expenses, work clothes and uniforms, union dues and fees, and the cost of work-related small tools and supplies, Safe deposit box rental, Tax counsel and assistance, and Certain fees paid to an IRA trustee or custodian. Www statetaxforms AGI. Www statetaxforms   For the purpose of estimating your itemized deductions, your AGI is your estimated total income for 2014 minus any estimated adjustments to income (discussed later) that you include on line 4 of the Deductions and Adjustments Worksheet. Www statetaxforms Phaseout of itemized deductions. Www statetaxforms   For 2014, your total itemized deductions may be phased out (reduced) if your AGI is more than the following thresholds. Www statetaxforms    Itemized Deduction Phaseout Threshold Single $254,200 Married filing jointly or qualifying widow(er) $305,050 Married filing separately $152,525 Head of household $279,650   If you expect your AGI to be more than the amount listed, use Worksheet 1–2 to figure your reduction in itemized deductions. Www statetaxforms Worksheet 1-2. Www statetaxforms Deductions and Adjustments Worksheet (Form W-4)—Line 1 Phaseout of Itemized Deductions 1. Www statetaxforms Enter the estimated total of your itemized deductions 1. Www statetaxforms   2. Www statetaxforms Enter the amount included in line 1 for medical and dental expenses, investment interest, casualty or theft losses, and gambling losses 2. Www statetaxforms   3. Www statetaxforms Is the amount on line 2 less than the amount on line 1? ❑ No. Www statetaxforms Stop here. Www statetaxforms Your deduction is not limited. Www statetaxforms Enter the amount from line 1 above on line 1 of the Deductions and Adjustments Worksheet. Www statetaxforms  ❑ Yes. Www statetaxforms Subtract line 2 from line 1. Www statetaxforms 3. Www statetaxforms       4. Www statetaxforms Multiply line 3 by 80% (. Www statetaxforms 80) 4. Www statetaxforms       5. Www statetaxforms Enter your expected AGI 5. Www statetaxforms       6. Www statetaxforms Enter $305,050 If married filing jointly or qualifying widow(er), $279,650 if head of household, $254,200 if single, or $152,525 if married filing separately 6. Www statetaxforms   7. Www statetaxforms Is the amount on line 6 less than the amount on line 5? ❑ No. Www statetaxforms Stop here. Www statetaxforms Your deduction is not limited. Www statetaxforms Enter the amount from line 1 above on line 1 of the Deductions and Adjustments Worksheet. Www statetaxforms  ❑ Yes. Www statetaxforms Subtract line 6 from line 5. Www statetaxforms 7. Www statetaxforms       8. Www statetaxforms Multiply line 7 by 3% (. Www statetaxforms 03) 8. Www statetaxforms       9. Www statetaxforms Enter the smaller of line 4 or line 8 9. Www statetaxforms     10. Www statetaxforms Subtract line 9 from line 1. Www statetaxforms Enter the result here and on line 1 of the Deductions and Adjustments Worksheet 10. Www statetaxforms     Adjustments to income (worksheet line 4). Www statetaxforms   Enter your estimated total adjustments to income on line 4 of the Deductions and Adjustments Worksheet. Www statetaxforms   You can take the following adjustments to income into account when figuring additional withholding allowances for 2014. Www statetaxforms These adjustments appear on page 1 of your Form 1040 or 1040A. Www statetaxforms Net losses from Schedules C, D, E, and F of Form 1040 and from Part II of Form 4797, line 18b. Www statetaxforms Net operating loss carryovers. Www statetaxforms Certain business expenses of reservists, performing artists, and fee-based government officials. Www statetaxforms Health savings account or medical savings account deduction. Www statetaxforms Certain moving expenses. Www statetaxforms Deduction for self-employment tax. Www statetaxforms Deduction for contributions to self-employed SEP, and qualified SIMPLE plans. Www statetaxforms Self-employed health insurance deduction. Www statetaxforms Penalty on early withdrawal of savings. Www statetaxforms Alimony paid. Www statetaxforms IRA deduction. Www statetaxforms Student loan interest deduction. Www statetaxforms Jury duty pay given to your employer. Www statetaxforms Reforestation amortization and expenses. Www statetaxforms Deductible expenses related to income reported on line 21 from the rental of personal property engaged in for profit. Www statetaxforms Repayment of certain supplemental unemployment benefits. Www statetaxforms Contributions to IRC 501(c)(18)(D) pension plans. Www statetaxforms Contributions by certain chaplains to IRC 403(b) plans. Www statetaxforms Attorney fees and court costs for certain unlawful discrimination claims. Www statetaxforms Attorney fees and court costs for certain whistleblower awards. Www statetaxforms Estimated amount of decrease in tax attributable to income averaging using Schedule J (Form 1040). Www statetaxforms Tax credits (worksheet line 5). Www statetaxforms   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). Www statetaxforms But you can take these credits and others into account by adding an extra amount on line 5 of the Deductions and Adjustments Worksheet. Www statetaxforms   If you take the child and dependent care credit into account on line 5, do not use line F. Www statetaxforms If you take the child tax credit into account on line 5, do not use line G. Www statetaxforms   In addition to the child and dependent care credit and the child tax credit, you can generally take into account the following credits. Www statetaxforms See the individual tax form instructions for more details. Www statetaxforms Foreign tax credit, except any credit that applies to wages not subject to U. Www statetaxforms S. Www statetaxforms income tax withholding because they are subject to income tax withholding by a foreign country. Www statetaxforms See Publication 514, Foreign Tax Credit for Individuals. Www statetaxforms Credit for the elderly or the disabled. Www statetaxforms See Publication 524, Credit for the Elderly or the Disabled. Www statetaxforms Education credits. Www statetaxforms See Publication 970, Tax Benefits for Education. Www statetaxforms Retirement savings contributions credit (saver's credit). Www statetaxforms See Publication 590. Www statetaxforms Mortgage interest credit. Www statetaxforms See Publication 530, Tax Information for Homeowners. Www statetaxforms Adoption credit. Www statetaxforms See the Instructions for Form 8839. Www statetaxforms Credit for nonrefundable portion of prior year minimum tax if you paid alternative minimum tax in an earlier year. Www statetaxforms See the Instructions for Form 8801. Www statetaxforms General business credit. Www statetaxforms See the Instructions for Form 3800. Www statetaxforms Earned income credit. Www statetaxforms See Publication 596. Www statetaxforms Figuring line 5 entry. Www statetaxforms   To figure the amount to add on line 5 for tax credits, multiply your estimated total credits by the appropriate number from Table 1-3 . Www statetaxforms Example. Www statetaxforms You are married and expect to file a joint return for 2014. Www statetaxforms Your combined estimated wages are $68,000. Www statetaxforms 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). Www statetaxforms In Table 1-3, the number corresponding to your combined estimated wages ($42,001 – $98,000) is 6. Www statetaxforms 7. Www statetaxforms Multiply your total estimated tax credits of $2,660 by 6. Www statetaxforms 7. Www statetaxforms 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. Www statetaxforms 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. Www statetaxforms Nonwage income (worksheet line 6). Www statetaxforms   Enter on line 6 your estimated total nonwage income (other than tax-exempt income). Www statetaxforms Nonwage income includes interest, dividends, net rental income, unemployment compensation, alimony, gambling winnings, prizes and awards, hobby income, capital gains, royalties, and partnership income. Www statetaxforms   If line 6 is more than line 5, you may not have enough income tax withheld from your wages. Www statetaxforms See Getting the Right Amount of Tax Withheld , later. Www statetaxforms Net deductions and adjustments (worksheet line 8). Www statetaxforms    If line 7 is less than $3,950, enter “0” on line 8. Www statetaxforms If line 7 is $3,950 or more, divide it by $3,950, drop any fraction, and enter the result on line 8. Www statetaxforms Example. Www statetaxforms If line 7 is $5,200, $5,200 ÷ $3,950 = 1. Www statetaxforms 32. Www statetaxforms Drop the fraction (. Www statetaxforms 32) and enter “1” on line 8. Www statetaxforms 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 $50,000 ($20,000 if married). Www statetaxforms Reducing your allowances (worksheet lines 1-3). Www statetaxforms   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). Www statetaxforms Using Table 1 in the Two-Earners/Multiple Jobs Worksheet, find the number listed beside the amount of your estimated wages for the year from your lowest paying job (or if lower and you are filing jointly, your spouse's job). Www statetaxforms Enter that number on line 2. Www statetaxforms However, if you are married filing jointly and estimated wages from the highest paying job are $65,000 or less, do not enter more than “3. Www statetaxforms ”    Table 1-3. Www statetaxforms Deductions and Adjustments Worksheet (Form W-4)—Line 5 a. Www statetaxforms  Married Filing Jointly or Qualifying Widow(er) If combined income from all sources is:   Multiply credits by: $0 – 42,000 10. Www statetaxforms 0 $42,001 – 98,000 6. Www statetaxforms 7 $98,001 – 180,000 4. Www statetaxforms 0 $180,001 – 270,000 3. Www statetaxforms 6 $270,001 – 440,000 3. Www statetaxforms 0 $440,001 – 490,000. Www statetaxforms . Www statetaxforms . Www statetaxforms . Www statetaxforms 2. Www statetaxforms 9 $490,001 and over 2. Www statetaxforms 5 b. Www statetaxforms  Single If combined income from all sources is:   Multiply credits by: $0 – 19,000 10. Www statetaxforms 0 $19,001 – 47,000 6. Www statetaxforms 7 $47,001 – 104,000 4. Www statetaxforms 0 $104,001 – 205,000 3. Www statetaxforms 6 $205,001 – 430,000 3. Www statetaxforms 0 $430,001 and over 2. Www statetaxforms 5 c. Www statetaxforms  Head of Household If combined income from all sources is:   Multiply credits by: $0 – 30,000 10. Www statetaxforms 0 $30,001 – 66,000 6. Www statetaxforms 7 $66,001 – 150,000 4. Www statetaxforms 0 $150,001 – 235,000 3. Www statetaxforms 6 $235,001 – 430,000 3. Www statetaxforms 0 $430,001 – 460,000 2. Www statetaxforms 9 $460,001 and over 2. Www statetaxforms 5 d. Www statetaxforms  Married Filing Separately   If combined income from all sources is:   Multiply credits by: $0 – 21,000 10. Www statetaxforms 0 $21,001 – 49,000 6. Www statetaxforms 7 $49,001 – 90,000 4. Www statetaxforms 0 $90,001 – 135,000 3. Www statetaxforms 6 $135,001 – 220,000 3. Www statetaxforms 0 $220,001 – 245,000 2. Www statetaxforms 9 $245,001 and over 2. Www statetaxforms 5   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. Www statetaxforms If line 1 is more than or equal to line 2, do not use the rest of the worksheet. Www statetaxforms   If line 1 is less than line 2, enter “0” on Form W-4, line 5. Www statetaxforms Then complete lines 4 through 9 of the worksheet to figure the additional withholding needed to avoid underwithholding. Www statetaxforms Other amounts owed. Www statetaxforms   If you expect to owe amounts other than income tax, such as self-employment tax, include them on line 8. Www statetaxforms The total is the additional withholding needed for the year. Www statetaxforms Getting the Right Amount of Tax Withheld 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. Www statetaxforms You accurately complete all the Form W-4 worksheets that apply to you. Www statetaxforms You give your employer a new Form W-4 when changes occur. Www statetaxforms But because the worksheets and withholding methods do not account for all possible situations, you may not be getting the right amount withheld. Www statetaxforms This is most likely to happen in the following situations. Www statetaxforms You are married and both you and your spouse work. Www statetaxforms You have more than one job at a time. Www statetaxforms You have nonwage income, such as interest, dividends, alimony, unemployment compensation, or self-employment income. Www statetaxforms You will owe additional amounts with your return, such as self-employment tax. Www statetaxforms Your withholding is based on obsolete Form W-4 information for a substantial part of the year. Www statetaxforms Your earnings are more than $130,000 if you are single or $180,000 if you are married. Www statetaxforms You work only part of the year. Www statetaxforms You change the number of your withholding allowances during the year. Www statetaxforms You are subject to Additional Medicare Tax or Net Investment Income Tax. Www statetaxforms If you anticipate liability for Additional Medicare Tax or Net Investment Income Tax, you may request that your employer withhold an additional amount of income tax withholding on Form W-4. Www statetaxforms Part-Year Method If you work only part of the year and your employer agrees to use the part-year withholding method, less tax will be withheld from each wage payment than would be withheld if you worked all year. Www statetaxforms To be eligible for the part-year method, you must meet both of the following requirements. Www statetaxforms You must use the calendar year (the 12 months from January 1 through December 31) as your tax year. Www statetaxforms You cannot use a fiscal year. Www statetaxforms You must not expect to be employed for more than 245 days during the year. Www statetaxforms To figure this limit, count all calendar days that you are employed (including weekends, vacations, and sick days) beginning with the first day you are on the job for pay and ending with your last day of work. Www statetaxforms If you are temporarily laid off for 30 days or less, count those days too. Www statetaxforms If you are laid off for more than 30 days, do not count those days. Www statetaxforms You will not meet this requirement if you begin working before May 1 and expect to work for the rest of the year. Www statetaxforms How to apply for the part-year method. Www statetaxforms   You must ask your employer in writing to use this method. Www statetaxforms The request must state all three of the following. Www statetaxforms The date of your last day of work for any prior employer during the current calendar year. Www statetaxforms That you do not expect to be employed more than 245 days during the current calendar year. Www statetaxforms That you use the calendar year as your tax year. Www statetaxforms Cumulative Wage Method If you change the number of your withholding allowances during the year, too much or too little tax may have been withheld for the period before you made the change. Www statetaxforms You may be able to compensate for this if your employer agrees to use the cumulative wage withholding method for the rest of the year. Www statetaxforms You must ask your employer in writing to use this method. Www statetaxforms To be eligible, you must have been paid for the same kind of payroll period (weekly, biweekly, etc. Www statetaxforms ) since the beginning of the year. Www statetaxforms Aids for Figuring Your Withholding IRS Withholding Calculator. Www statetaxforms   If you had too much or too little income tax withheld from your pay, the IRS provides a withholding calculator on its website. Www statetaxforms Go to www. Www statetaxforms irs. Www statetaxforms gov/Individuals/IRS-Withholding-Calculator. Www statetaxforms It can help you determine the correct amount to be withheld any time during the year. Www statetaxforms Rules Your Employer Must Follow It may be helpful for you to know some of the withholding rules your employer must follow. Www statetaxforms These rules can affect how to fill out your Form W-4 and how to handle problems that may arise. Www statetaxforms New Form W-4. Www statetaxforms   When you start a new job, your employer should give you a Form W-4 to fill out. Www statetaxforms Beginning with your first payday, your employer will use the information you give on the form to figure your withholding. Www statetaxforms   If you later fill out a new Form W-4, your employer can put it into effect as soon as possible. Www statetaxforms The deadline for putting it into effect is the start of the first payroll period ending 30 or more days after you turn it in. Www statetaxforms No Form W-4. Www statetaxforms   If you do not give your employer a completed Form W-4, your employer must withhold at the highest rate, as if you were single and claimed no withholding allowances. Www statetaxforms Repaying withheld tax. Www statetaxforms   If you find you are having too much tax withheld because you did not claim all the withholding allowances you are entitled to, you should give your employer a new Form W-4. Www statetaxforms Your employer cannot repay any of the tax previously withheld. Www statetaxforms Instead, claim the full amount withheld when you file your tax return. Www statetaxforms   However, if your employer has withheld more than the correct amount of tax for the Form W-4 you have in effect, you do not have to fill out a new Form W-4 to have your withholding lowered to the correct amount. Www statetaxforms Your employer can repay the amount that was withheld incorrectly. Www statetaxforms If you are not repaid, your Form W-2 will reflect the full amount actually withheld, which you would claim when you file your tax return. Www statetaxforms IRS review of your withholding. Www statetaxforms   Whether you are entitled to claim a certain number of allowances or a complete exemption from withholding is subject to review by the IRS. Www statetaxforms Your employer may be required to send a copy of the Form W-4 to the IRS. Www statetaxforms There is a penalty for supplying false information on Form W-4. Www statetaxforms See Penalties , later. Www statetaxforms   If the IRS determines that you cannot claim more than a specified number of withholding allowances or claim a complete exemption from withholding, the IRS will issue a notice of the maximum number of withholding allowances permitted (commonly referred to as a “lock-in letter”) to both you and your employer. Www statetaxforms   The IRS will provide a period of time during which you can dispute the determination before your employer adjusts your withholding. Www statetaxforms If you believe that you are entitled to claim complete exemption from withholding or claim more withholding allowances than the maximum number specified by the IRS in the lock-in letter, you must submit a new Form W-4 and a written statement to support your claims to the IRS. Www statetaxforms Contact information (a toll-free number and an IRS office address) will be provided in the lock-in letter. Www statetaxforms At the end of this period, if you have not responded or if your response is not adequate, your employer will be required to withhold based on the original lock-in letter. Www statetaxforms   After the lock-in letter takes effect, your employer must withhold tax on the basis of the withholding rate (marital status) and maximum number of withholding allowances specified in that letter. Www statetaxforms   If you later believe that you are entitled to claim exemption from withholding or more allowances than the IRS determined, you can complete a new Form W-4 and a written statement to support the claims made on the Form W-4 and send them directly to the IRS address shown on the lock-in letter. Www statetaxforms Your employer must continue to figure your withholding on the basis of the number of allowances previously determined by the IRS until the IRS advises your employer otherwise. Www statetaxforms   At any time, either before or after the lock-in letter becomes effective, you may give your employer a new Form W-4 that does not claim complete exemption from withholding and results in more income tax withheld than specified in the lock-in letter. Www statetaxforms Your employer must then withhold tax based on this new Form W-4. Www statetaxforms   Additional information is available at IRS. Www statetaxforms gov. Www statetaxforms Enter “withholding compliance questions” in the search box. Www statetaxforms Exemption From Withholding If you claim exemption from withholding, your employer will not withhold federal income tax from your wages. Www statetaxforms The exemption applies only to income tax, not to social security or Medicare tax. Www statetaxforms You can claim exemption from withholding for 2014 only if both of the following situations apply. Www statetaxforms For 2013 you had a right to a refund of all federal income tax withheld because you had no tax liability. Www statetaxforms For 2014 you expect a refund of all federal income tax withheld because you expect to have no tax liability. Www statetaxforms Use Figure 1-A to help you decide whether you can claim exemption from withholding. Www statetaxforms Do not use Figure 1-A if you: Are 65 or older, Are blind, Will itemize deductions on your 2014 return, Will claim an exemption for a dependent on your 2014 return, or Will claim any tax credits on your 2014 return. Www statetaxforms These situations are discussed later. Www statetaxforms Students. Www statetaxforms   If you are a student, you are not automatically exempt. Www statetaxforms If you work only part time or during the summer, you may qualify for exemption from withholding. Www statetaxforms Example 1. Www statetaxforms You are a high school student and expect to earn $2,500 from a summer job. Www statetaxforms 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. Www statetaxforms You worked last summer and had $375 federal income tax withheld from your pay. Www statetaxforms The entire $375 was refunded when you filed your 2013 return. Www statetaxforms Using Figure 1-A, you find that you can claim exemption from withholding. Www statetaxforms Please click here for the text description of the image. Www statetaxforms Figure 1-A: Exemption From Withholding on Form W-4 Example 2. Www statetaxforms The facts are the same as in Example 1, except that you also have a savings account and expect to have $400 interest income during the year. Www statetaxforms Using Figure 1-A, you find that you cannot claim exemption from withholding because your unearned income will be more than $350 and your total income will be more than $1,000. Www statetaxforms    You may have to file a tax return, even if you are exempt from withholding. Www statetaxforms See Publication 501 to see whether you must file a return. Www statetaxforms    Age 65 or older or blind. Www statetaxforms 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. Www statetaxforms Do not use either worksheet if you will itemize deductions, claim exemptions for dependents, or claim tax credits on your 2014 return. Www statetaxforms Instead, see Itemizing deductions or claiming exemptions or credits, next. Www statetaxforms Itemizing deductions or claiming exemptions or credits. Www statetaxforms   If you had no tax liability for 2013, and you will: Itemize deductions, Claim an exemption for a dependent, or Claim a tax credit, use the 2014 Estimated Tax Worksheet (also see chapter 2), to figure your 2014 expected tax liability. Www statetaxforms You can claim exemption from withholding only if your total expected tax liability (line 13c of the worksheet) is zero. Www statetaxforms Claiming exemption from withholding. Www statetaxforms   To claim exemption, you must give your employer a Form W-4. Www statetaxforms Do not complete lines 5 and 6. Www statetaxforms Enter “Exempt” on line 7. Www statetaxforms   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. Www statetaxforms If you claim exemption in 2014 but you expect to owe income tax for 2015, you must file a new Form W-4 by December 1, 2014. Www statetaxforms   Your claim of exempt status may be reviewed by the IRS. Www statetaxforms See IRS review of your withholding , earlier. Www statetaxforms An exemption is good for only 1 year. Www statetaxforms   You must give your employer a new Form W-4 by February 15 each year to continue your exemption. Www statetaxforms Supplemental Wages Supplemental wages include bonuses, commissions, overtime pay, vacation allowances, certain sick pay, and expense allowances under certain plans. Www statetaxforms The payer can figure withholding on supplemental wages using the same method used for your regular wages. Www statetaxforms However, 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. Www statetaxforms Expense allowances. Www statetaxforms   Reimbursements or other expense allowances paid by your employer under a nonaccountable plan are treated as supplemental wages. Www statetaxforms A nonaccountable plan is a reimbursement arrangement that does not require you to account for, or prove, your business expenses to your employer or does not require you to return your employer's payments that are more than your proven expenses. Www statetaxforms   Reimbursements or other expense allowances paid under an accountable plan that are more than your proven expenses are treated as paid under a nonaccountable plan if you do not return the excess payments within a reasonable period of time. Www statetaxforms Accountable plan. Www statetaxforms   To be an accountable plan, your employer's reimbursement or allowance arrangement must include all three of the following rules. Www statetaxforms Your expenses must have a business connection. Www statetaxforms That is, you must have paid or incurred deductible expenses while performing services as an employee of your employer. Www statetaxforms You must adequately account to your employer for these expenses within a reasonable period of time. Www statetaxforms You must return any excess reimbursement or allowance within a reasonable period of time. Www statetaxforms    An excess reimbursement or allowance is any amount you are paid that is more than the business-related expenses that you adequately accounted for to your employer. Www statetaxforms   The definition of reasonable period of time depends on the facts and circumstances of your situation. Www statetaxforms However, regardless of those facts and circumstances, actions that take place within the times specified in the following list will be treated as taking place within a reasonable period of time. Www statetaxforms You receive an advance within 30 days of the time you have an expense. Www statetaxforms You adequately account for your expenses within 60 days after they were paid or incurred. Www statetaxforms You return any excess reimbursement within 120 days after the expense was paid or incurred. Www statetaxforms You are given a periodic statement (at least quarterly) that asks you to either return or adequately account for outstanding advances and you comply within 120 days of the statement. Www statetaxforms Nonaccountable plan. Www statetaxforms   Any plan that does not meet the definition of an accountable plan is considered a nonaccountable plan. Www statetaxforms For more information about accountable and nonaccountable plans, see chapter 6 of Publication 463, Travel, Entertainment, Gift, and Car Expenses. Www statetaxforms Penalties You may have to pay a penalty of $500 if both of the following apply. Www statetaxforms You make statements or claim withholding allowances on your Form W-4 that reduce the amount of tax withheld. Www statetaxforms You have no reasonable basis for those statements or allowances at the time you prepare your Form W-4. Www statetaxforms 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. Www statetaxforms The penalty upon conviction can be either a fine of up to $1,000 or imprisonment for up to 1 year, or both. Www statetaxforms 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. Www statetaxforms A simple error or an honest mistake will not result in one of these penalties. Www statetaxforms 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. Www statetaxforms However, see chapter 4 for information on the penalty for underpaying your tax. Www statetaxforms Tips The tips you receive while working on your job are considered part of your pay. Www statetaxforms You must include your tips on your tax return on the same line as your regular pay. Www statetaxforms However, tax is not withheld directly from tip income, as it is from your regular pay. Www statetaxforms Nevertheless, your employer will take into account the tips you report when figuring how much to withhold from your regular pay. Www statetaxforms Reporting tips to your employer. Www statetaxforms   If you receive tips of $20 or more in a month while working for any one employer, you must report to your employer the total amount of tips you receive on the job during the month. Www statetaxforms The report is due by the 10th day of the following month. Www statetaxforms   If you have more than one job, make a separate report to each employer. Www statetaxforms Report only the tips you received while working for that employer, and only if they total $20 or more for the month. Www statetaxforms How employer figures amount to withhold. Www statetaxforms   The tips you report to your employer are counted as part of your income for the month you report them. Www statetaxforms Your employer can figure your withholding in either of two ways. Www statetaxforms By withholding at the regular rate on the sum of your pay plus your reported tips. Www statetaxforms By withholding at the regular rate on your pay plus a percentage of your reported tips. Www statetaxforms Not enough pay to cover taxes. Www statetaxforms   If your regular pay is not enough for your employer to withhold all the tax (including income tax and social security and Medicare taxes (or the equivalent railroad retirement tax)) due on your pay plus your tips, you can give your employer money to cover the shortage. Www statetaxforms   If you do not give your employer money to cover the shortage, your employer first withholds as much Medicare tax and social security or railroad retirement tax as possible, up to the proper amount, and then withholds income tax up to the full amount of your pay. Www statetaxforms If not enough tax is withheld, you may have to pay estimated tax. Www statetaxforms When you file your return, you also may have to pay any Medicare and social security tax or railroad retirement tax your employer could not withhold. Www statetaxforms Tips not reported to your employer. Www statetaxforms   On your tax return, you must report all the tips you receive during the year, even tips you do not report to your employer (this includes the value of any noncash tips you received, such as tickets, passes, or other items of value). Www statetaxforms Make sure you are having enough tax withheld, or are paying enough estimated tax (see chapter 2), to cover all your tip income. Www statetaxforms Allocated tips. Www statetaxforms   If you work in a large food or beverage establishment, your employer may have to report an allocated amount of tips on your Form W-2. Www statetaxforms   Your employer should not withhold income tax, Medicare tax, and social security or railroad retirement tax on the allocated amount. Www statetaxforms Withholding is based only on your pay plus your reported tips. Www statetaxforms Your employer should refund to you any incorrectly withheld tax. Www statetaxforms More information. Www statetaxforms   For more information on the reporting and withholding rules for tip income and on tip allocation, see Publi