How to Calculate Allowances for California Income Tax
Accurately calculating the exemption allowance for California income taxes requires using the worksheets that accompany the Employee's Withholding Allowance Certificate, Form DE 4. The worksheets help a taxpayer analyze his current situation to arrive at the appropriate exemption amount so income tax withholding matches the tax liability at the end of the year on Form 540, the California personal income tax return.
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Instructions
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Calculate regular withholding allowances by considering how many dependents you can claim in addition to yourself and whether you or your spouse qualify for the additional allowance for legal blindness. Fill in Lines A through E on Worksheet A and total the regular allowances on Line F.
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Consider whether you should claim more allowances or fewer allowances. For example, if your family income is derived from more than one income, consider whether claiming all the exemption allowances to which you are entitled for each job will cause underwithholding of state income taxes and result in an unpaid tax liability at the end of the year. Owing tax when you file Form 540 could result in a tax penalty.
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Complete Worksheet B to determine your estimated tax deductions. Estimate the deduction you can claim if you itemize deductions on Form 540 and compare it to the standard deduction allowance for your personal situation. Enter your estimated itemized deduction total on Line 1 of Worksheet B and the appropriate standard deduction total on Line 2;
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Fill in other deductible amounts on Worksheet 2, Lines 4 through 10, to add additional deductions, such as alimony you pay and IRA contribution deductions. Include additional nonwage income, such as interest, dividends or passive income items. Use these amounts to calculate Line 8 of Worksheet 2, the number of exemption allowances you should claim on Form DE 4, Line 1.
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Compare Line 6 on Worksheet 2, nonwage income, to Line 5, total deductions. If Line 5 is greater, subtract Line 6 from Line 5, divide by 1,000, round to the nearest whole number and enter it on Line 8. For example, if Line 5, total deductions, are 4,000 and Line 6, nonwage income, is 6,000, Line 8 equals two (6,000 - 4,000 = 2,000/1,000 = 2). The number of exemption allowances you should claim is 2. Enter this number on Line 1 of Form DE 4.
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Complete Worksheet C if your nonwage income is higher than the deductions on Line 5 of Worksheet 2. Worksheet 3 will guide you in figuring the total estimated state income tax you will pay. Instead of using exemption allowances, divide your estimated tax liability by the number of pay periods in the year and complete Form DE 4, Line 2 to request your employer withhold that amount from each paycheck.
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