fatbrit

We have an abusive relationship with a medium term history.

ugacrew

FB and I have a highly contentious relationship. He pulls my pig tales and I give him a good punch in the nose. We kiss and make up after that.

Michael

fatbrit is correct except about someone being an idiot.

The government doesn't care whether you file a W4 (Employee Witholding Certificate) indicating that you have 1 or 20 dependents or whether you are married or single. They are only interested that you pay 90% or more of the tax owed by the end of the year. If you pay less than 90%, you may get an interest and penalty assesment but if you pay more than 100%, you are just giving the government an interest free loan until you receive your refund check.

So how you calculate how much you owe is up to you whether you are self-employed filing guartly estimates or filing a W4 as an employee.

Giantaxe

They do have the right to ask for justification as to the number of withholding allowances you are claiming. Not sure how frequently they do this, but it did happen to me one tax year. Tax wthheld is deemed to have been withheld evenly across the year regardless of when it was actually withheld, so the "abuse" they are trying to stop is grossly backloading withholding to the very end of the tax year by claiming an unjustifiably high number of allowances in the rest of the year.

fatbrit

Moral -- don't overdo it! But do it properly and you'll be fine. A spreadsheet is best.

kins

OK a question. If you get paid a 20% bonus once a year, can you adjust your dependents just for that week so you don't overpay your tax?

I'm really sick of getting taxed to the hilt on our bonus, which is paid at the start of the year, then waiting till the following year to reclaim the tax.

Michael

Your not supposed to adjust the exemptions for that one period but instead you are supposed to increase the exemptions for the whole year to to come out with zero tax owed by the end of year (compensating for things such as bonus).

However, saying that, a lot of times when I had large capital gains or other income during the year, I reduced the number of exemptions during the end of the year to pay for the capital gains tax owed during the rest of the year. Then on Janurary 1, I changed the exemptions back to nomal. If I didn't do that, I would have to file a quarterly estimate. The government never questioned me about any of that.

fatbrit

Spreadsheet, estimate, correct as data comes in and fine tune. Advantage of getting paid the bonus at the beginning of the year is that you have plenty of time to get the adjustment right.

Michael

Once you have one year under your belt (witholding from January 1) and future earnings remains relatively stable (income + certain percent bonus + reoccuring deductions), normally you can use that to fill out the W4 for the next year. As an example, lets say you get a tax refund of $6,000 and your marginal rate is 28% and the value of each dependent deduction is $3,500, when filling out the W4 that person should be able to claim about an additional 6 dependents ($3,500 per dependent * 6 dependents = $21,000 *.28 marginal tax rate = $5,880 amount of tax reduction which means you will get a refund of about $120 the following year).

The above only works if there is a single earner. If both husband and wife are both earners, it becomes more complicated. Since the W4 assumes that you are the sole earner, if that earner claimed married filling jointly, all the deductions and non-marginal tax rates will be used up by that person (example. part of the income will be tax free, part is taxed at 10%, part is taxed at 15%, part will be taxed at 25%, and the remainder is taxed at 28%. If the spouse starts to work, that person in reality will be taxed at the 28% rate or higher immediately. This can cause a major shortage of taxes paid if that person files married filing jointly.

fatbrit

Yep -- the W4 really is a pile of useless crap. With a married couple earning, suggest the lower wage earner leaves their W4 fixed and you do the corrections about with just one. Probably easiest to have the low earner with zero dependents.

Michael

The good thing is that the IRS does not charge penalties and interest if the couple had a witholding large enough to cover taxes in the previous year. So if a husband was working the previous year and enough was witheld for taxes and then the wife starts to work the following year, even if the W4s are all messed up and they don't have enough taxes witheld, they normally won't be charged penalties and interest due to the following rule if filing jointly. I believe the same occurs for the first year that you file since you previous years tax was $0.

If you have increased your withholding this year such that now it is going to be more than your last year’s tax (110% of last year’s tax if your last years AGI was over $150,000 ) you won’t have a penalty, even if you owe taxes when you file your return.

kins

Thanks for the replies.

It hadn't occured to me that we could start adjusting this year's W4s already to make up for the tax hit on the bonus earlier this year. Going off to find payslips now...