The “right” answer is that you should claim the amount of allowances that you qualify for based on you specific income for the year. The W-4 worksheet is great for helping you figure that number.
and according to the form you should only claim “EXEMPT” if both of the following apply to you:
-Last year I had a right to a refund of all federal income tax withheld because I had no tax liability and
-This year I expect a refund of all federal income tax withheld because I expect to have no tax liability
The practical answer is if you ABSOLUTLY need the extra $XX.XX now you can write exempt on line 7 and sign the form and your employer will not withhold any federal tax from your last paycheck. You can also write in up to 10 allowances on line 5, which will reduce the tax withheld significantly and get the extra money in your pocket now. I would not write both the allowances and exempt on the form and I would not advocate making false statements.
The big thing to look at is how this will affect your TOTAL tax paid for the year. Where you might have a problem is if your total withheld for the year is too low.
The rule is that you must pay as you go and must have paid at least
90% of your 2010 tax liability
or 100% of your 2009 tax
If you do not pay enough you will owe under payment penalties.
I have claimed additional allowances for tax planning purposes and have ended up underpaid for the year, but I have always been within the safe harbor limits and therefore have never been penalized.
I would check out IRS PUB 919 and PUB 505 to help you decide what you will do.
https://www.irs.gov/pub/irs-pdf/p919.pdf
https://www.irs.gov/pub/irs-pdf/p505.pdf
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