I will go from 3 Federal tax exemptions to 2 for tax year 2016, and my W-4 withholding is already at M-0. Does it make more sense from a tax perspective to either A) put the full amount of over age 50 catch-up contributions into my TSP ($6000) to reduce my taxable income or B) change my W-4 to have additional money withheld from my pay?
The same thing is happening to my family! With our son out of the house and on his own, gone will be that $4,050 exemption for 2016. To get the best advice, you should sit down with your tax advisor and map out a plan based on all that is and will be happening with respect to your taxes. In the meantime, here are a couple of things to consider related to your question:
Contributions to the traditional TSP help on two fronts. All other things being equal, increasing your contribution to the traditional TSP by $4,050 would enough to offset any negative impact of losing one exemption. As an added benefit, you'll be bolstering your retirement savings...which is never a bad thing.
Adjusting your withholding could make sense. Whether you end up getting a big refund or owing a bunch of money at tax time, it could make sense to adjust your withholding. In your case, that could mean signing up to have some additional money withheld each pay period. However, if you are set to get a big refund this year, that may not be necessary. A tax advisor or even your tax preparation software can help you make the correct call.
It looks like I'm going to get a bit of an oversized refund this year, so I'm going to hold pat, but talk with your tax advisor and figure out what makes the most sense for you and your family. Good luck.