How Many Allowances Should I Claim in NJ?

Tax withholding involves the money your employer deducts from each paycheck for taxes. The concept of “allowances” guides your employer on how much tax to withhold to align with your estimated annual tax liability. Claiming the correct number of allowances helps ensure you neither overpay nor underpay your taxes.

What Allowances Mean for Your Paycheck

An allowance reduces the amount of your income subject to tax. Claiming more allowances means less tax is withheld from your paycheck, leading to a larger take-home amount. Conversely, fewer allowances result in more tax withheld and a smaller take-home pay. These allowances are not the same as tax deductions or credits applied on your annual income tax return. They serve as an estimated calculation used by your employer for payroll tax purposes.

Determining Your Federal Withholding

For federal income tax withholding, use Form W-4. Since 2020, the IRS redesigned this form, moving away from the traditional “allowances” system to a more direct approach based on dollar amounts for credits and adjustments. The form guides you through steps to account for your personal information, such as filing status and the number of dependents.

You will consider other income sources, like a second job or a spouse’s income, and potential itemized deductions or tax credits, such as the Child Tax Credit. The IRS provides a free online tool called the Tax Withholding Estimator. This estimator uses your latest pay statements, information on other income, and your most recent tax return to help you determine what to enter on your W-4.

Determining Your New Jersey Withholding

For New Jersey state income tax, employees complete Form NJ-W4, Employee’s Withholding Allowance Certificate. This form is separate from the federal W-4. On the NJ-W4, you will provide your filing status for New Jersey income tax purposes and indicate the number of allowances you are claiming.

Each allowance claimed on the NJ-W4 generally corresponds to an exemption on your New Jersey tax return, reducing the amount of state income tax withheld from your pay. The form also allows for additional amounts to be withheld if you anticipate owing more tax, or to claim exemption from withholding if your income falls below a certain threshold. Instructions accompanying the NJ-W4, including a wage chart for those with multiple jobs or higher combined incomes, help in calculating these figures to ensure accurate state withholding.

When to Update Your Withholding

Reviewing and updating your federal Form W-4 and New Jersey Form NJ-W4 is important when significant life events occur. Changes such as marriage or divorce, the birth or adoption of a child, or starting or losing a job (especially a second one) directly impact your tax situation. A substantial change in income or deductions, or major shifts in tax law, also warrant a review.

It is a good practice to review your withholding annually to ensure it accurately reflects your financial circumstances. If adjustments are needed, complete a new W-4 and/or NJ-W4 and submit it to your employer. Your employer will then adjust your tax deductions accordingly.