Author Topic: Tax witholding question  (Read 714 times)

slappy

  • Pencil Stache
  • ****
  • Posts: 502
Tax witholding question
« on: January 10, 2018, 01:13:14 PM »
My understanding of the new tax laws is that I will likely not owe any tax for 2018. I will have three children and my income will probably be around 70k, although it will depend on OT and bonuses. Is it acceptable to adjust my withholding so that I end up with no tax withheld? As I have a better idea of what my final income will be, I can adjust them later in the year to start withholding. Does that sound like a fair plan?

MDM

  • Walrus Stache
  • *******
  • Posts: 7419
Re: Tax witholding question
« Reply #1 on: January 10, 2018, 01:25:41 PM »
Yes to both questions.  Good luck!

slappy

  • Pencil Stache
  • ****
  • Posts: 502
Re: Tax witholding question
« Reply #2 on: January 10, 2018, 01:28:53 PM »
Yes to both questions.  Good luck!

Thanks! :)

rubybeth

  • Handlebar Stache
  • *****
  • Posts: 1240
  • Location: Midwest
Re: Tax witholding question
« Reply #3 on: January 10, 2018, 01:32:39 PM »
Sure, I've done that before. The year my husband wasn't working due to grad school stuff, I realized I had my withholding way too high. So I basically adjusted my withholding for the last few months of the year to minimize my refund. It's better to have more dollars in your pocket during the year and owe a few hundred dollars to state/federal taxes each year than end up with a refund.
"Done is the engine of more." - the Done Manifesto

terran

  • Pencil Stache
  • ****
  • Posts: 914
Re: Tax witholding question
« Reply #4 on: January 10, 2018, 01:41:45 PM »
Sure. If it starts looking like you'll owe, make sure you leave enough time to jack your withholding up to cover it. Estimated tax payments have to be made evenly throughout the year (unless you can show you paid when you received uneven income), but withholding can happen anytime during the year.

You pay a penalty unless:

1) Your tax liability is less than $1000 (not the amount you owe, but the total liability). Your amount owed (total liability less amount paid) is less than $1000
2) You paid at least 90% of you tax liability for the current year.
3) You paid at least 100% (110% for higher income) of you tax liability from the previous year.

Edit: I was replying to another thread and realized I made a mistake (as pointed out below) about the $1000 owed liability. Fixed now.
« Last Edit: January 11, 2018, 01:24:31 PM by terran »

secondcor521

  • Handlebar Stache
  • *****
  • Posts: 1276
  • Age: 48
  • Location: Boise, Idaho
  • Big cattle, no hat.
    • Age of Eon - Overwatch player videos
Re: Tax witholding question
« Reply #5 on: January 10, 2018, 02:34:15 PM »
You pay a penalty unless:

1) Your tax liability is less than $1000 (not the amount you owe, but the total liability).

I think this is incorrect.  I think you will not owe a penalty as long as your withholding and estimated payments are within $1K of your actual liability.  Although the wording on the IRS website below is slightly different:

Cite:  https://www.irs.gov/taxtopics/tc306
Like Overwatch?  Check out this YouTube channel:  http://bit.ly/AgeOfEon

dandarc

  • Magnum Stache
  • ******
  • Posts: 3034
  • Age: 35
Re: Tax witholding question
« Reply #6 on: January 10, 2018, 02:40:10 PM »
+1 to secondor521's interpretation - that's how I've always heard / seen the $1K safe-harbor explained.

terran

  • Pencil Stache
  • ****
  • Posts: 914
Re: Tax witholding question
« Reply #7 on: January 11, 2018, 01:22:43 PM »
You pay a penalty unless:

1) Your tax liability is less than $1000 (not the amount you owe, but the total liability).

I think this is incorrect.  I think you will not owe a penalty as long as your withholding and estimated payments are within $1K of your actual liability.  Although the wording on the IRS website below is slightly different:

Cite:  https://www.irs.gov/taxtopics/tc306

Yeah, I was just replying to another topic about this and realized my mistake and came back here to correct myself, thanks for catching it :-). The other safe harbors are based on total liability, but the $1000 safe harbor is based on amount owed.

tyler2016

  • 5 O'Clock Shadow
  • *
  • Posts: 30
    • Tyler's Guides
Re: Tax witholding question
« Reply #8 on: January 11, 2018, 06:45:52 PM »
I hate the way our payroll tax withholding system works. W4s over simplify things. They can't account for traditional IRA contributions, itemized deductions, investment income, etc. I'm tempted to see if I can have my job set it to zero and just pay quarterly taxes. Would I be getting myself into trouble by doing this?

MDM

  • Walrus Stache
  • *******
  • Posts: 7419
Re: Tax witholding question
« Reply #9 on: January 11, 2018, 07:19:42 PM »
I hate the way our payroll tax withholding system works. W4s over simplify things. They can't account for traditional IRA contributions, itemized deductions, investment income, etc. I'm tempted to see if I can have my job set it to zero and just pay quarterly taxes. Would I be getting myself into trouble by doing this?
Not necessarily, but withholding is "better" for you when it comes time to determine if you paid enough during the year.  See 2018 Withholding allowances if interested.

slappy

  • Pencil Stache
  • ****
  • Posts: 502
Re: Tax witholding question
« Reply #10 on: January 12, 2018, 05:46:50 AM »
I hate the way our payroll tax withholding system works. W4s over simplify things. They can't account for traditional IRA contributions, itemized deductions, investment income, etc. I'm tempted to see if I can have my job set it to zero and just pay quarterly taxes. Would I be getting myself into trouble by doing this?

I agree.  I have a spouse and three children and I set my exemptions to 7. However, under the new tax plan, I anticipate paying 0 taxes next year, so I checked my paycheck yesterday and even with 7, they still witheld $120. So I bumped it up to 9 and I'll see where that gets me, but why should I have to claim almost the actual amount that I have? It seems crazy.

HarbingerofBunnies

  • Walrus Stache
  • *******
  • Posts: 7630
  • Age: 33
  • Location: SE WI
  • Lunatic urban homesteader
Re: Tax witholding question
« Reply #11 on: January 12, 2018, 07:09:04 AM »
Wait for the IRS withholding calculator to get updated. They said it should be online in February. Itís usually pretty close to getting your taxes to zero. I think last year  our refund was about $100.

I have a family of 5 but because of the tax sheltering, our W-4 uses 13 allowances, for example.
Can we talk about how rabbits look like the harbingers of destruction and bloodshed on the battlefield whenever they yawn?

AT DAWN WE RIDE!

*Presenting at CM*TO 2018*

MacGyverIt

  • Stubble
  • **
  • Posts: 228
  • Location: Not in a tropical, underpopulated location. And that's just wrong.
  • What Would MacGyver Do?
Re: Tax witholding question
« Reply #12 on: January 12, 2018, 09:42:36 AM »
I've come upon a similar scenario. I calculated my withholding using a state/federal tax calculator and then the new tax deal went through and although at my base pay I went from 28% to 24% if I hit my bonus this year, I'll go from 24% to 32%. Ten percent federal income tax increase over a potential $20K bonus. I'm considering asking my boss to limit my bonus to $16,5K keep me at the 24% income level.

I know, it's a first world problem but I'm so tired of the federal government taking more and more of my hard earned dollars without providing affordable health care or infrastructure improvements (i.e. mass transit).

EDIT: And no sooner than posting this I realized I didn't take into account my pre-tax 401k deduction which will spare me going over the 32%    $157,500 after all but thanks to this post realize I need to re-calculate my withholdings based upon the 24% tax rate.

*sigh of relief*
« Last Edit: January 12, 2018, 09:46:40 AM by MacGyverIt »
------------------------------------------------------------
"I never really celebrated success by spending money. I store up that money for allowing me time to wait to get the money to do the things I really want to do." - Terry Gilliam, member & director of, Monty Python & the Holy Grail

terran

  • Pencil Stache
  • ****
  • Posts: 914
Re: Tax witholding question
« Reply #13 on: January 12, 2018, 09:54:47 AM »
I've come upon a similar scenario. I calculated my withholding using a state/federal tax calculator and then the new tax deal went through and although at my base pay I went from 28% to 24% if I hit my bonus this year, I'll go from 24% to 32%. Ten percent federal income tax increase over a potential $20K bonus. I'm considering asking my boss to limit my bonus to $16,5K keep me at the 24% income level.

I know, it's a first world problem but I'm so tired of the federal government taking more and more of my hard earned dollars without providing affordable health care or infrastructure improvements (i.e. mass transit).

EDIT: And no sooner than posting this I realized I didn't take into account my pre-tax 401k deduction which will spare me going over the 32%    $157,500 after all.

*sigh of relief*

My guess is you don't understand how tax brackets work. The only way asking your boss to limit your bonus to stay in a lower bracket would make sense is if moving up a bracket subjected all of your income to that bracket's rate. This isn't how it works. You pay tax on the income in each bracket at that bracket's rate, then income in the next bracket is taxed at that rate.

So if a $16.5k bonus puts right at the top of the 24%, then only the extra $3500 if you get your $20k bonus will be taxed at 32%, so that's still an extra $2380 in your pocket. It's actually less since you also have to pay state taxes and medicare tax (you're over the wage limit for paying additional social security tax), but still you'll always have more money in your pocket by taking the extra bonus rather than not.

MacGyverIt

  • Stubble
  • **
  • Posts: 228
  • Location: Not in a tropical, underpopulated location. And that's just wrong.
  • What Would MacGyver Do?
Re: Tax witholding question
« Reply #14 on: January 12, 2018, 10:06:44 AM »
My guess is you don't understand how tax brackets work.

Hence I post here to get expert feedback. Reading your explanation, I knew this but the tax change had me thinking incorrectly about its overall impact so clearly I needed a brain refresh. Thanks, Terran.
« Last Edit: January 12, 2018, 10:08:18 AM by MacGyverIt »
------------------------------------------------------------
"I never really celebrated success by spending money. I store up that money for allowing me time to wait to get the money to do the things I really want to do." - Terry Gilliam, member & director of, Monty Python & the Holy Grail

terran

  • Pencil Stache
  • ****
  • Posts: 914
Re: Tax witholding question
« Reply #15 on: January 12, 2018, 11:13:56 AM »
My guess is you don't understand how tax brackets work.

Hence I post here to get expert feedback. Reading your explanation, I knew this but the tax change had me thinking incorrectly about its overall impact so clearly I needed a brain refresh. Thanks, Terran.

It's a common misconception.

tyler2016

  • 5 O'Clock Shadow
  • *
  • Posts: 30
    • Tyler's Guides
Re: Tax witholding question
« Reply #16 on: January 13, 2018, 05:16:10 AM »

I've come upon a similar scenario. I calculated my withholding using a state/federal tax calculator and then the new tax deal went through and although at my base pay I went from 28% to 24% if I hit my bonus this year, I'll go from 24% to 32%. Ten percent federal income tax increase over a potential $20K bonus. I'm considering asking my boss to limit my bonus to $16,5K keep me at the 24% income level.

I know, it's a first world problem but I'm so tired of the federal government taking more and more of my hard earned dollars without providing affordable health care or infrastructure improvements (i.e. mass transit).

EDIT: And no sooner than posting this I realized I didn't take into account my pre-tax 401k deduction which will spare me going over the 32%    $157,500 after all.

*sigh of relief*

My guess is you don't understand how tax brackets work. The only way asking your boss to limit your bonus to stay in a lower bracket would make sense is if moving up a bracket subjected all of your income to that bracket's rate. This isn't how it works. You pay tax on the income in each bracket at that bracket's rate, then income in the next bracket is taxed at that rate.

So if a $16.5k bonus puts right at the top of the 24%, then only the extra $3500 if you get your $20k bonus will be taxed at 32%, so that's still an extra $2380 in your pocket. It's actually less since you also have to pay state taxes and medicare tax (you're over the wage limit for paying additional social security tax), but still you'll always have more money in your pocket by taking the extra bonus rather than not.

Unless the extra income makes the AMT apply. I haven't looked into how the bill changes the AMT yet as it won't apply this year.

MDM

  • Walrus Stache
  • *******
  • Posts: 7419
Re: Tax witholding question
« Reply #17 on: January 13, 2018, 08:35:04 AM »
My guess is you don't understand how tax brackets work. The only way asking your boss to limit your bonus to stay in a lower bracket would make sense is if moving up a bracket subjected all of your income to that bracket's rate. This isn't how it works. You pay tax on the income in each bracket at that bracket's rate, then income in the next bracket is taxed at that rate.

So if a $16.5k bonus puts right at the top of the 24%, then only the extra $3500 if you get your $20k bonus will be taxed at 32%, so that's still an extra $2380 in your pocket. It's actually less since you also have to pay state taxes and medicare tax (you're over the wage limit for paying additional social security tax), but still you'll always have more money in your pocket by taking the extra bonus rather than not.

Unless the extra income makes the AMT apply. I haven't looked into how the bill changes the AMT yet as it won't apply this year.
The AMT will change only the tax rate on income above the point at which the AMT becomes applicable.  Instead of "Unless the extra income makes the AMT apply" it would be correct to say "Including when the extra income makes the AMT apply."