Author Topic: Federal Withholding  (Read 5136 times)

marblejane

  • Bristles
  • ***
  • Posts: 397
  • Location: Western Slope, CO
Federal Withholding
« on: February 16, 2015, 09:56:27 PM »
Guys, I just finished my taxes. I've been adjusting my withholdings all year to make sure that I wouldn't give the government a big interest free loan. I owe $95 to the feds.

MDM

  • Senior Mustachian
  • ********
  • Posts: 11477
Re: Federal Withholding
« Reply #1 on: February 16, 2015, 10:08:05 PM »
Well done!

Monkey Uncle

  • Handlebar Stache
  • *****
  • Posts: 1740
  • Location: West-by-god-Virginia
Re: Federal Withholding
« Reply #2 on: February 17, 2015, 04:17:04 AM »
Try to owe even more next year. I'm planning to underpay during the year by $10,000+ this year, with no penalty.

O.K., I'll bite.  How are you going to avoid the penalty?

MDM

  • Senior Mustachian
  • ********
  • Posts: 11477
Re: Federal Withholding
« Reply #3 on: February 17, 2015, 07:45:41 AM »
Try to owe even more next year. I'm planning to underpay during the year by $10,000+ this year, with no penalty.

O.K., I'll bite.  How are you going to avoid the penalty?
I'd guess by using one of the "safe harbor" options described in
http://www.pappastax.com/irs-underpayment-penalty-safe-harbor-rules/ and
http://www.dailyfinance.com/2013/12/13/tax-penalty-2013-underpayment-withholding/

Those articles are for diferent years, so the specific numbers may have changed, but the principles apply.

marblejane

  • Bristles
  • ***
  • Posts: 397
  • Location: Western Slope, CO
Re: Federal Withholding
« Reply #4 on: February 17, 2015, 10:05:47 AM »
Ok, so thought experiment then- let's say I did deliberately try to underpay taxes this year in order to owe $10k to the IRS next year when I do my taxes. What's the benefit of doing this? What do I do with that money for the 9 months or so that I have it?

NICE!

  • Pencil Stache
  • ****
  • Posts: 682
  • Location: Africa
Re: Federal Withholding
« Reply #5 on: February 17, 2015, 01:46:46 PM »
I do the same thing I do with the rest of my money: invest it.

$10,000 is small enough that I personally won't need to have any money "set aside" to pay it when it's due, aside from saving some income before April 15th. I would imagine if you pay enough taxes to be able to underpay by $10,000 without a penalty, that is probably true for you too.

However, even if you did need to have $10,000 "set aside" to pay the remaining taxes, I would still invest it during the year. Yes, it could be worth less in 9 months but it could also be worth more. I don't see it being a big deal either way, assuming you put it in an investment that goes up on average such as stocks. I realise this is contrary to the advice you read everywhere else not to put your money in the stock market for a short horizon, but I think if you carefully consider what I said, you'll realise it's actually not a shocking suggestion. Of course, this only makes sense if you have some large amount of assets already. If the tax underpayment was your only asset, you wouldn't want to invest it during the year...

This is a fantastic idea I've never considered. Thank you for describing it - I will definitely think about it and then discuss with DW. I doubt she'll be into it, but we will see.

forummm

  • Walrus Stache
  • *******
  • Posts: 7374
  • Senior Mustachian
Re: Federal Withholding
« Reply #6 on: February 18, 2015, 07:05:19 AM »
This sounds a little "too cute" for me. The only safe harbor that could apply to most people for a $10k amount is that you paid 100% of the previous year's liability. So, you could only really do this every-other year, and really only if you had $0 liability in the alternating years. So you'd have to be able to alternate between $0 liability one year, and $10k+ liability the next year. For the other safe harbor, you'd have to have a $100k tax liability for 90% to be $10k. If your income is that high, you probably aren't on this message board.

marblejane

  • Bristles
  • ***
  • Posts: 397
  • Location: Western Slope, CO
Re: Federal Withholding
« Reply #7 on: February 18, 2015, 05:34:06 PM »
Thanks Cathy. This won't work for me this year but it is an interesting idea.

hownowbrowncow

  • 5 O'Clock Shadow
  • *
  • Posts: 92
Re: Federal Withholding
« Reply #8 on: March 30, 2015, 12:25:11 AM »
I did this to pay off my student loan. 

1) Finished grad in June.  Had been working part-time while being a full-time student Jan - June. Worked full-time job Jun - Dec. Stumbled on MMM late that year.
2) Got a few thousand back the next April because I was dumbass and didn't pro-rate my withholding to account for the fact I only worked half the year.  Of course I immediately dumped that into my loan. 
3) Throughout that same year I had the minimum withheld from each paycheck because the larger take home pay home meant bigger payments.
4) Yes I owed a few thousand by the time April rolled around again but I had paid off my loan at that point and had the cash on hand to do so.  No penalty because my minimal tax payments were well over the previous years' total.  It helped that my income had more than doubled.

It worked great for me to accelerate my student loan payoff.  Now I try to underpay by about $999 - because I like the interest free loan!

 

Wow, a phone plan for fifteen bucks!