It's actually not as uncommon as you might think. I only have moderate deductions (well under the reported averages for my tax bracket), but my income fluctuates, particularly with significant bonuses during the year. If someone has either high deductions or fluctuating income, it may make sense to increase the number of deductions - to avoid making an interest free loan to the IRS. You just want to be careful not to take TOO many and owing them a large chunk of money.
In any event, that's not what happened here - he simply did it to reduce withholding and is going to have to give it back. THAT is a bad idea. I was just objecting to the statement that it's always a stupid thing to do.
Hint: I am a tax professional...been at it for more than 20 years. Yes, if someone's income seriously fluctates, particularly spiking at bonus time, then yes, it can make sense to adjust your withholding exemptions. I myself do that because I make the majority of my yearly income during the first 4 months of the year. However, unless you can reasonably predict your income for the year, its wise to make those changes temporary, just to handle the spiking periods. As of May first each year, I know exactly what my income will be for the entire year. Therefore its easy for me to adjust for the balance of the year at that time.
However, the vast majority of people who claim significantly more exemptions than they have people in their family, are not doing it because of income fluctations. They are doing it because they are stupid....LOL. They are doing it because someone told them that they can do that and not have any money taken out of their check for federal withholding. They don't grasp what that means when they file their tax returns.
A large majority of them make it even worse. They see the sticker shock when they prepare their returns, and then don't file at all. Then when they finally decide to go to a tax professional for help, and finally have it explained to them that their withholding is the problem, its often too late to correct it for the current year, so they have the same problem again.
I dealt with just such a client today. She is working two jobs and the second job brings in half again as much as the first job, but of course the employer is not withholding enough because the employer is doing it based on her W4 saying single and 1. She did her taxes on Turbo Tax, discovered that she owed a ton, and just buried her head in the sand until today. Unfortunately she had the same problem for 2006. Now, the IRS is not going to give her too much grief about adding 2007's balance to her installment agreement, but they WILL give her serious grief if it happens a third time, so now she not only has to pay the installment agreement, which eats into her income, but she also has to have enough extra withheld from her pay for the final last 5 months of the year, to ensure that she doesn't have the same problem for 2008, so she is going to be seriously hurting.
I have lots of high income clients, and lots of low income clients, and no more than a handful of the 700+ clients I handle a year, actually have a valid reason to mess with their exemptions.
Therefore your advice was dangerous....because when you gave your advice you didn't explain the circumstances surrounding it....and didn't explain as to how few people that applied.
The internet and software are wonderful things where taxes are concerned, but they are also bad things because they have dumbed down the general populations as to how taxes work. When people used to have to read the instructions in order to do their own taxes, people in general had a better handle on how taxes generally worked. They may not have known the nitty gritty, but they at least grasped the basics.
