Comments on: A Reader Asks About Tax Withholdings And Savings

By: BR

BR — Wed, 24 Jan 2007 20:41:02 +0000

I adjust my withholdings throughout the year to do what HC says. According to my employer’s tax person, I can go up to 10 withholdings without my employer contacting the IRS. Beyond that, they are required to contact the IRS. Last year, I paid $80. I’ll get it to zero one of these years.

By: HC

HC — Tue, 23 Jan 2007 19:40:32 +0000

For the vast majority of filers, withholding isn’t binary.

When I thought I was going to be short last year, I simply adjusted my withholding allowance by adding on $5 a pay period to my 2 exemptions. Then, when I realized I had forgotten that my health insurance premiums weren’t taxable, I stopped sending the $5 and upped my exemptions to 3. I’m still getting a refund, but a much smaller one than I would have otherwise (and yes, I did save the difference).

This year, I’ll have a smaller student loan interest deduction, so I dropped my exemptions back to 2. Granted, not every HR system makes it as easy to adjust one’s W-4 as mine, but it’s still not that complex.

I’d say if people are willing to use the withholding calculator on the IRS website twice a year, then they should be able to make adjustments to reduce their refund without dealing with quarterly payments or potential penalties.

By: frank

frank — Tue, 23 Jan 2007 19:15:06 +0000

Don’t forget about the 110% safe harbour clause. If you withold 110% of last years tax bill, even if you owe money in the coming year, you will not be subject to additional fees and interest.
Of course, this is only material if you think that your tax bill would be substantially different from the year before.

By: CF25

CF25 — Tue, 23 Jan 2007 17:59:43 +0000

IMO, the “withhold the minimum, high-interest savings, pay at the end” is better than witholding too much and giving the government an interest-free loan.
If you get a $1500 tax return, you could have been earning 2-5% on that throughout the year.
Different strokes for different folks though

By: Luke

Luke — Tue, 23 Jan 2007 17:19:37 +0000

Lee is right. If you opt not to withhold Federal taxes from your paychecks, you must make timely and sufficiently calculated quarterly estimated payments. This still leaves you open to some risk, but it is hardly worth it as the money you aren’t paying in withholdings simply has to be remitted every quarter. It really doesn’t have much chance to sit in your interest bearing account.

The tax code was not originally set up this way, but there was such a large problem with compliance that the “pay as you go” system was put into place.

I personally think that if Americans were allowed to save the money themselves all year long and then remit the full Federal tax liability to the IRS on April 15th that we would have the threat of revolution on our hands, which depending on who you talk to may be exactly what we need.

As a tax accountant, it blows my mind how many people I speak to who are under the impression that they “don’t pay taxes” because the receive a refund on their return every year. They don’t seem to realize that they still pay a significant amount in taxes.

Regardless, I personally think we need a huge, sweeping tax reform.

By: Lee

Lee — Tue, 23 Jan 2007 17:01:25 +0000

Of course, there is one other big problem. The US tax system is designed as a “pay as you go” system. If you don’t periodically withhold your taxes you are expected to make quarterly “estimated tax” payments. If you do neither, then you must pay a penalty to the government if the amount you have to pay exceeds $1000.

There can be some exceptions to this and one is if you are making a lot more money one year than the year before you only have to make sure you pay as much as the previous year to avoid the penalty. But that is a rare occasion to make some extra interest.