Consider cases where the number of withholding allowances is less than 6. Which will cause the amount of federal income tax withheld to increase?
a. Gross pay stays the same and withholding allowances increase.
b. Gross pay increases by more than $20 and withholding allowances stay the same.
c. Gross pay increases by more than $20 and withholding allowances increase.
d. Gross pay decreases by more than $20 and withholding allowances stay the same.
Answer (2)
Increasing withholding allowances while gross pay stays the same decreases the amount of tax withheld.
Increasing gross pay while withholding allowances stay the same increases the amount of tax withheld.
Increasing both gross pay and withholding allowances has an uncertain effect on the amount of tax withheld.
Decreasing gross pay while withholding allowances stay the same decreases the amount of tax withheld. Therefore, the answer is B .
Explanation
Analyzing the Options The question asks which scenario will cause an increase in federal income tax withheld, given that the number of withholding allowances is less than 6. Let's analyze each option:
Option A: If gross pay stays the same and withholding allowances increase, the amount of federal income tax withheld will decrease because more of the income is shielded from taxation.
Option B: If gross pay increases by more than $20 and withholding allowances stay the same, the amount of federal income tax withheld will increase because a larger portion of the income is subject to taxation.
Option C: If gross pay increases by more than $20 and withholding allowances increase, the effect on the amount of federal income tax withheld is uncertain without knowing the magnitude of each change. It could increase, decrease, or stay the same depending on the specific amounts.
Option D: If gross pay decreases by more than $20 and withholding allowances stay the same, the amount of federal income tax withheld will decrease because a smaller portion of the income is subject to taxation.
Determining the Correct Answer Comparing the effects of each option, only option B guarantees an increase in the amount of federal income tax withheld.
Conclusion Therefore, the best answer is B .
Examples
Understanding how gross pay and withholding allowances affect federal income tax is crucial for managing personal finances. For example, if you anticipate a significant increase in your income during the year (e.g., due to a new job or a promotion), you might want to keep your withholding allowances the same or even decrease them to avoid owing a large sum in taxes at the end of the year. Conversely, if your income decreases, you might want to increase your withholding allowances to reduce the amount of taxes withheld from each paycheck. This ensures that you're neither overpaying nor underpaying your taxes throughout the year.
The best answer is B : If gross pay increases by more than $20 and withholding allowances stay the same, federal income tax withheld will increase. This is due to the larger amount of income being fully subject to taxation. Evaluating the changes in both gross pay and allowances is crucial to understanding how taxes are calculated.
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