Author Topic: Exemption from federal withholding on W4  (Read 8645 times)

frugalnacho

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Exemption from federal withholding on W4
« on: January 21, 2015, 08:22:09 PM »
I am married, no kids, and my wife doesn't work.

I did my taxes and I am getting a huge refund (nearly $8k).  I have $0 federal tax liability and almost no state liability (about $150). 

Approximate numbers:  Earned 60k, put 16k in 401k, and 8k in tIRA.  This brought my AGI to 36k and my federal taxes to $0 once credits were applied.  I paid a few thousand extra on my mortgage, put several thousand in taxable accounts, and will be filling up the rest of my IRA allowance using roth (since I have no incentive to use tIRA at this point).   I anticipate maxing out my 401k, and maxing out our IRAs (split between tIRA and roth) to get my federal taxes to $0 again next year.

I am filling out a W4 and qualify for exemption from withholding because I meet both requirements:

1. I had no tax liability in 2014
2. I anticipate the same thing for 2015

But this is for federal only.  How will this affect my state withholding?

Is there anything I am overlooking?  Or should I be fine to just have no withholding?  Will there be a penalty if I am wrong and end up owing taxes in 2015? 

firewalker

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Re: Exemption from federal withholding on W4
« Reply #1 on: January 21, 2015, 08:40:53 PM »
How did you do that? I make nothing near what you do and I have witholding and get hardly anything back.

MDM

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Re: Exemption from federal withholding on W4
« Reply #2 on: January 21, 2015, 08:41:12 PM »
But this is for federal only.  How will this affect my state withholding?

Is there anything I am overlooking?  Or should I be fine to just have no withholding?  Will there be a penalty if I am wrong and end up owing taxes in 2015?
The federal W-4 has no effect on the state W-4.  Appears you live in Michigan so you would need to submit a MI-W4 to your employer to change state withholding.  You wouldn't be able to claim "exemption from MI withholding" but you can increase the "number of exemptions" until the amount withheld is low. 

In general, no penalty as long as you owe <$1,000 for federal and less than $500 for Michigan.  Somewhere ~9-10 exemptions would work for the MI-W4 if your 2015 numbers will match the OP.

MDM

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Re: Exemption from federal withholding on W4
« Reply #3 on: January 21, 2015, 08:52:57 PM »
How did you do that? I make nothing near what you do and I have witholding and get hardly anything back.
Don't know OP's exact numbers, but they are certainly plausible:

  $60,000  Gross
- $16,000  401k
- $  8,000  IRA
    ---------
   $36,000  AGI

- $12,600  Std. Deduction
- $  8,000  Exemptions
    --------- 
   $15,400 Taxable Income

For MFJ, this is in the 10% bracket so:

  $  1,540  Tax
- $  1,540  Savers' Credit
    ---------
           $0  Payment due IRS

Numbers above are for 2015.  See spreadsheet downloadable from http://forum.mrmoneymustache.com/ask-a-mustachian/how-to-write-a-%27case-study%27-topic/msg274228/#msg274228 if you'd like to play "what if?" with other numbers.

firewalker

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Re: Exemption from federal withholding on W4
« Reply #4 on: January 21, 2015, 09:09:45 PM »
Thanks MDM. My gross is well below his AGI so I'm definetly doing something wrong.

frugalnacho

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Re: Exemption from federal withholding on W4
« Reply #5 on: January 21, 2015, 09:57:09 PM »
How did you do that? I make nothing near what you do and I have witholding and get hardly anything back.
Don't know OP's exact numbers, but they are certainly plausible:

  $60,000  Gross
- $16,000  401k
- $  8,000  IRA
    ---------
   $36,000  AGI

- $12,600  Std. Deduction
- $  8,000  Exemptions
    --------- 
   $15,400 Taxable Income

For MFJ, this is in the 10% bracket so:

  $  1,540  Tax
- $  1,540  Savers' Credit
    ---------
           $0  Payment due IRS

Numbers above are for 2015.  See spreadsheet downloadable from http://forum.mrmoneymustache.com/ask-a-mustachian/how-to-write-a-%27case-study%27-topic/msg274228/#msg274228 if you'd like to play "what if?" with other numbers.

Bingo.   36k is the threshold for the tax savers credit multiplier of 0.5 (for married filing jointly).  So by filling up our IRAs to the point I have exactly $36k AGI I qualify for the full refund, which calculates out to $2k ($1k for my IRA contributions, and $1k for contributions to my wife's IRA).  It's not refundable, so I am utilizing $1543 of the available $2k, which wipes out my liability entirely.

If you haven't contributed to your IRA for 2014 you still have until April 15th to do so.  If you are not married and just filing for yourself you can get a portion of your contribution back if your AGI is less than 30k.  You have to be under 18k to get the full $1k credit though.  But every dollar you contribute to an IRA or 401k reduces your AGI.

http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-Retirement-Savings-Contributions-Credit-%28Saver%E2%80%99s-Credit%29

frugalnacho

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Re: Exemption from federal withholding on W4
« Reply #6 on: January 21, 2015, 09:58:36 PM »
But this is for federal only.  How will this affect my state withholding?

Is there anything I am overlooking?  Or should I be fine to just have no withholding?  Will there be a penalty if I am wrong and end up owing taxes in 2015?
The federal W-4 has no effect on the state W-4.  Appears you live in Michigan so you would need to submit a MI-W4 to your employer to change state withholding.  You wouldn't be able to claim "exemption from MI withholding" but you can increase the "number of exemptions" until the amount withheld is low. 

In general, no penalty as long as you owe <$1,000 for federal and less than $500 for Michigan.  Somewhere ~9-10 exemptions would work for the MI-W4 if your 2015 numbers will match the OP.

Thanks, exactly the information I needed!

MDM

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Re: Exemption from federal withholding on W4
« Reply #7 on: January 21, 2015, 09:59:52 PM »
Thanks MDM. My gross is well below his AGI so I'm definetly doing something wrong.
Not necessarily wrong - just different.  Two big differences: filing status (single vs. MFJ) and having/not having Savers' Credit.  E.g., does yours look at all like the numbers below...?

  $20,400  Gross
- $     863  pre-tax health insur.
    ---------
   $19,537  AGI

- $  6,300  Std. Deduction
- $  4,000  Exemption
    --------- 
   $  9,237 Taxable Income

For single, this is (just barely) in the 15% bracket so:

  $     924  Tax
- $         0  Savers' Credit
    ---------
         $924  Payment due IRS

MDM

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Re: Exemption from federal withholding on W4
« Reply #8 on: January 21, 2015, 11:46:37 PM »
Interesting fact for the OP: even if you earn $1,000,000 in 2015 and have a massive tax liability at year-end while not having had a dollar withheld or paid a cent in estimated payments, there will still be no underpayment penalty pursuant to 26 USC §6654(e)(2). So be sure to earn a lot of money this year to take advantage of that.

This is correct for OP's federal, and close to correct for OP's state (p. 7 of http://www.michigan.gov/documents/taxes/MI-1040_Book_406578_7.pdf).  The pertinent part of the US Code is
Quote
“required [withholding]” means the lesser of—
(i) 90 percent of the tax shown on the return for the taxable year (or, if no return is filed, 90 percent of the tax for such year), or
(ii) 100 percent of the tax shown on the return of the individual for the preceding taxable year.
In other words, in addition to the "if you owe <$X (X=$1000 for federal and $500 for Michigan)" penalty escape, if you withhold at least the amount quoted above you also pay no penalty.  In OP's case, 100% of $0 (tax for preceding year) is $0 so no withholding is needed for federal, and ~$150 (or whatever the actual 2013 MI tax) is all that is needed for state.

It's actually a nice feature to understand, particularly for new workers with increasing year-over-year wages: withhold as much as you paid (in total) the previous year and no penalties will occur.  One more wrinkle: if you make >$150K you need to withhold 110% of last year's tax.  Thanks, Cathy, for the reminder.

MDM

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Re: Exemption from federal withholding on W4
« Reply #9 on: March 03, 2015, 12:34:22 PM »
An interesting quirk of the Michigan statute (MCL 206.301) is that provides another "escape hatch" insofar as you are not required to make any estimated payments unless it can be "reasonably expected" that you will owe at least $500 at the end of the year. This allows you to avoid any penalty by arguing it couldn't have been expected that you would exceed that (e.g. large bonus or other windfall at the end of the year!).
The official form MI-2210 (Underpayment of Estimated Income Tax) includes the phrase "No penalty is charged if estimates were not required in the immediately preceding year; however, interest may still be due."

TaxAct asks this specific question (were estimates required for 2013?) and ignores the penalty if the answer is no.  TurboTax asks about 2013 tax, but not specifically whether estimates were required, and calculates a penalty.  Methinks (ok, 99% actually thinks, 1% is happy to assume) TA is more accurate than TT here.

ShoulderThingThatGoesUp

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Re: Exemption from federal withholding on W4
« Reply #10 on: March 03, 2015, 02:03:09 PM »
What is this saver's credit witchcraft?  I'm also entranced by this ability to contribute to a traditional IRA and be able to deduct that from your tax liability, as I'm single and not accustomed to seeing income levels like this while having tax deductibility for IRAs.  So help me out, is this a plausible scenario for a married couple?

  $99,025  Gross
-    $7575  SS & Medicare
- $18,000  401k (husband)
-    $5500  IRA (husband)
- $18,000  401k (wife)
-    $5500  IRA (wife)
-    $1800 (HDHP, dental, vision insurance)
-    $6650 HSA
    ---------
   $36,000  AGI

- $12,600  Std. Deduction
- $  8,000  Exemptions
    --------- 
   $15,400 Taxable Income

For MFJ, this is in the 10% bracket so:

  $  1,540  Tax
- $  1,540  Savers' Credit
    ---------
           $0  Payment due IRS

Is this plausible?  I'm not saying I'm mad, but does our tax law really permit gross income up to $99,025 while paying zero in federal income tax (aside from the $7575 of payroll tax)?  This makes early retirement look ridiculously easy for married high earners.  I mean we're talking almost a hundred grand and no federal income tax.  Someone tell me if this is accurate or not.  I have trouble believing this is possible.

We paid around $1500 in taxes for 2014 with gross income including dividends and capital gains around $95k. Child tax credit kicked in too, for us.

Sid Hoffman

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Re: Exemption from federal withholding on W4
« Reply #11 on: March 03, 2015, 02:10:42 PM »
EDIT: Updated as I put the HSA on the wrong line.  HSA contributions are not exposed to payroll tax.

What is this saver's credit witchcraft?  I'm also entranced by this ability to contribute to a traditional IRA and be able to deduct that from your tax liability, as I'm single and not accustomed to seeing income levels like this while having tax deductibility for IRAs.  So help me out, is this a plausible scenario for a married couple?

   $98,474  Gross
-    $6650  HSA
------------------
   $91,824  exposed to payroll taxes
-    $7025  SS & Medicare
- $18,000  401k (husband)
-    $5500  IRA (husband)
- $18,000  401k (wife)
-    $5500  IRA (wife)
-    $1800 (HDHP, dental, vision insurance)
    ---------
   $35,999  AGI

- $12,600  Std. Deduction
- $  8,000  Exemptions
    --------- 
   $15,400 Taxable Income

For MFJ, this is in the 10% bracket so:

  $  1,540  Tax
- $  1,540  Savers' Credit
    ---------
           $0  Payment due IRS

Is this plausible?  I'm not saying I'm mad, but does our tax law really permit gross income up to nearly $100k while paying zero in federal income tax (aside from the $7025 of payroll tax)?  This makes early retirement look ridiculously easy for married high earners.  I mean we're talking almost a hundred grand and no federal income tax.  Someone tell me if this is accurate or not.  I have trouble believing this is possible.

curler

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Re: Exemption from federal withholding on W4
« Reply #12 on: March 03, 2015, 02:16:43 PM »
EDIT: Updated as I put the HSA on the wrong line.  HSA contributions are not exposed to payroll tax.

What is this saver's credit witchcraft?  I'm also entranced by this ability to contribute to a traditional IRA and be able to deduct that from your tax liability, as I'm single and not accustomed to seeing income levels like this while having tax deductibility for IRAs.  So help me out, is this a plausible scenario for a married couple?

   $98,474  Gross
-    $6650  HSA
------------------
   $91,824  exposed to payroll taxes
-    $7025  SS & Medicare

I don't think you can deduct FICA tax from your income, or am I missing out on something?

MDM

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Re: Exemption from federal withholding on W4
« Reply #13 on: March 03, 2015, 02:21:48 PM »
EDIT: Updated as I put the HSA on the wrong line.  HSA contributions are not exposed to payroll tax.

What is this saver's credit witchcraft?  I'm also entranced by this ability to contribute to a traditional IRA and be able to deduct that from your tax liability, as I'm single and not accustomed to seeing income levels like this while having tax deductibility for IRAs.  So help me out, is this a plausible scenario for a married couple?

   $98,474  Gross
-    $6650  HSA
------------------
   $91,824  exposed to payroll taxes
-    $7025  SS & Medicare
- $18,000  401k (husband)
-    $5500  IRA (husband)
- $18,000  401k (wife)
-    $5500  IRA (wife)
-    $1800 (HDHP, dental, vision insurance)
    ---------
   $35,999  AGI

- $12,600  Std. Deduction
- $  8,000  Exemptions
    --------- 
   $15,400 Taxable Income

For MFJ, this is in the 10% bracket so:

  $  1,540  Tax
- $  1,540  Savers' Credit
    ---------
           $0  Payment due IRS

Is this plausible?  I'm not saying I'm mad, but does our tax law really permit gross income up to nearly $100k while paying zero in federal income tax (aside from the $7025 of payroll tax)?  This makes early retirement look ridiculously easy for married high earners.  I mean we're talking almost a hundred grand and no federal income tax.  Someone tell me if this is accurate or not.  I have trouble believing this is possible.
Not exactly.  You don't get to deduct FICA so your AGI is higher and that decreases the Saver's Credit.  Not sure if your insurance payments are pre-tax or post-tax.  See the reader case study spreadsheet (or TurboTax, TaxAct, Excel1040.com, etc.)  if you want to do more "what if?" scenarios.

Numbers below are from the RCS spreadsheet.

CategoryMonthlyCommentsAnnual
Salary/Wages$8,252$99,025
Pretax Health Ins.$100$1,200
Pretax Vision/Dental Ins.$50$600
HSA/Pension$554$6,650
FICA base salary/wages$7,548$90,575
Traditional IRA$917At maximum$11,000
401(k) / 403(b) / TSP / etc.$3,000At maximum$36,000
Income subject to IRS tax$3,631$43,575
Federal Adj. Gross Inc.$3,631$43,575
Federal tax$1772015 rates, MFJ, stand. ded., 2 exempt.$2,124
Soc. Sec.$468Assumes 2 earners paying$5,616
Medicare$109$1,313
Total income taxes$754$9,048
Income before other expenses  $2,877$34,527


Filing Status21=S, 2=MFJ
# of earners2
AGI$43,575
Std. Deduct.$12,600
Act. Deduct.$12,600
# Exempt.2
Exemption$8,000
Taxable$22,975
Tax$2,524
Savers' credit$400
Tax after n-d credit$2,124
# Children <170
Child Tax Cred.$0
EIC$0
Net Tax$2,124
Monthly$177
Mtg. Int. (guess)$0
Prop tax$0
Charity$0
Item. Deduct.$0

PathtoFIRE

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Re: Exemption from federal withholding on W4
« Reply #14 on: March 03, 2015, 02:55:35 PM »
Is this plausible?  I'm not saying I'm mad, but does our tax law really permit gross income up to nearly $100k while paying zero in federal income tax (aside from the $7025 of payroll tax)?

Throw in some 457s and a MFJ can earn more than 100k and pay zero federal tax liability, here's a real world example.
« Last Edit: March 03, 2015, 02:57:11 PM by PathtoFIRE »

MDM

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Re: Exemption from federal withholding on W4
« Reply #15 on: March 03, 2015, 03:05:15 PM »
Throw in some 457s and a MFJ can earn more than 100k and pay zero federal tax liability, here's a real world example.
Yep.

One of the better quotes from that example:
Quote
Out of curiosity, I re-ran the tax calculations to see what our tax burden would be if we didn’t do any tax planning.  Our tax liability would increase to $19,883.  Good thing we know our way around the tax code!