But this is for federal only. How will this affect my state withholding?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.
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?
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:
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.
But this is for federal only. How will this affect my state withholding?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.
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?
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 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...?
Interesting fact for the OP: even if you earn $1,000,000 in 2015 and have a massive tax liability at year-end while not having had a dollar withheld or paid a cent in estimated payments, there will still be no underpayment penalty pursuant to 26 USC §6654 (http://www.law.cornell.edu/uscode/text/26/6654)(e)(2). So be sure to earn a lot of money this year to take advantage of that.
“required [withholding]” means the lesser of—In other words, in addition to the "if you owe <$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.
(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.
An interesting quirk of the Michigan statute (MCL 206.301 (http://www.legislature.mi.gov/%28S%28lzvhqeflpd3d0cqoqh22jb45%29%29/mileg.aspx?page=getobject&objectname=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."
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.
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
EDIT: Updated as I put the HSA on the wrong line. HSA contributions are not exposed to payroll tax.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 (http://forum.mrmoneymustache.com/ask-a-mustachian/how-to-write-a-%27case-study%27-topic/msg274228/#msg274228) (or TurboTax, TaxAct, Excel1040.com, etc.) if you want to do more "what if?" scenarios.
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.
Category | Monthly | Comments | Annual |
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 | $917 | At maximum | $11,000 |
401(k) / 403(b) / TSP / etc. | $3,000 | At maximum | $36,000 |
Income subject to IRS tax | $3,631 | $43,575 | |
Federal Adj. Gross Inc. | $3,631 | $43,575 | |
Federal tax | $177 | 2015 rates, MFJ, stand. ded., 2 exempt. | $2,124 |
Soc. Sec. | $468 | Assumes 2 earners paying | $5,616 |
Medicare | $109 | $1,313 | |
Total income taxes | $754 | $9,048 | |
Income before other expenses | $2,877 | $34,527 |
Filing Status | 2 | 1=S, 2=MFJ | |
# of earners | 2 | ||
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 <17 | 0 | ||
Child Tax Cred. | $0 | ||
EIC | $0 | ||
Net Tax | $2,124 | ||
Monthly | $177 | ||
Mtg. Int. (guess) | $0 | ||
Prop tax | $0 | ||
Charity | $0 | ||
Item. Deduct. | $0 |
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. (http://rootofgood.com/make-six-figure-income-pay-no-tax/)Yep.
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!