Ahh, kids! Long known to parents everywhere as nature's little tax deductions, they are one of the IRS' biggest personal deductions, worth about $3,650 each as of 2010, and one of the most commonly claimed deductions on yearly tax returns. In fact, in a point of contention among conservatives and liberals, having enough kids and a low enough income can actually exempt an entire family from paying federal taxes.
When you're hired in at a job, you have to fill out W-2 information that lets the IRS know how many dependents you want to claim. You can change this amount any time during the year, but be warned: If you think you can sneak by the IRS with six dependents, you can't. All your dependents have to have social security numbers. If they don't, you're going to get audited, and you might find yourself with a stiff fine and time to think about what you did in a federal pen. It basically works like this: You get one point for each of your dependents. If you have two children and are married, you can take four “points.” This will reduce your tax payment so that you have more money on a weekly basis for things like diapers, food and entertainment, because when you file your taxes, you'll claim these deductions anyway and receive a check.
While you are entitled to claim yourself, your spouse and your kids, should you? There are at least two reasons that you should think twice about it and reduce your number of dependents, which increases the amount taken out of your check for taxes. Take a look at these two reasons and decide if additional withholding is right for you.
Reason #1: You like that the government cuts you a check in April
The federal government is one of the best savings accounts available, and with the low interest rates most banks today give you, you really aren't losing anything anyway. Think of it this way: If you have an extra $20 per paycheck floating around, are you more likely to put it in the bank, or spend it?
If you answered that you're more likely to spend it, then you're in good, but unfortunate company. Most Americans today would do the same, and numerous studies performed by both private banks and the government bear this out. When it comes in one lump sum, however, like a tax refund to the tune of say $520, are you more likely to toss some into your savings account, or even pay off some debts with it, or blow it on a new T.V.?
Reason #2: You receive a 1099-MISC for a business
Small businesses and individuals that receive a 1099-MISC form for their business activities do so for practically anything. Artists, writers, independent contractors and others can expect to send as much as 30% of their earnings to the government to cover social security and federal taxes. While there are deductions you can make from these taxes for investment purposes, most artists and writers have a hard time finding any deductions at all. This is when avoiding taking too many deductions through the year can be helpful. Rather than being stuck with a huge tax bill in the spring, you can offset the expense and reduce how much you have to pay for your estimated taxes. Sure, you end up paying out of your regular paycheck a bit, but the bite isn't quite as harsh at the end of the year.