Trying to get as close to 0 as possible (owed vs. returned)

[LibrarIan]

I've decided that I want to stop getting tax returns. Not because they aren't fun to receive (they're really money I should have had in the first place) but because I'm tired of having the government sit on my money until they mail returns. I've gotten some kind of return every year and I've never really paid much attention to how returns/amounts owed are determined.

How can set up my situation to where I get as close to $0 owed/returned as possible come tax season? I will provide as much detail as possible, I just need to know where to start.

Thanks!

[RWD]

I've decided that I want to stop getting tax returns.

You mean "tax refunds". A tax return what you file with the IRS, regardless of whether you are due a refund.

Achieving your perfect withholding situation is fairly straightforward as long as you have a consistent income. You'll need to calculate how much tax you will owe for 2015 (looking at your 2014 documentation is a good start) and then adjust your W-4 such that your total withheld after your last paycheck for the year is the same amount.

[danipani85]

I'm in the same boat as OP. I've been all over the internet trying to figure out calculations, but I'm still not sure how to update my Husband and I's W-4's. Any clarification would be greatly appreciated.

[RWD]

I'm in the same boat as OP. I've been all over the internet trying to figure out calculations, but I'm still not sure how to update my Husband and I's W-4's. Any clarification would be greatly appreciated.

If you have a two income household it's a little tricky because the W-4 doesn't know how much your spouse makes. If your incomes are similar most likely you'll want to check "Married, but withhold at higher Single rate" on both forms.

The way the W-4 works is it takes your annual income (as projected by an individual paycheck), subtracts the standard deduction (depends on filing status checkbox) and number of allowances times $4000 (for 2015). The remaining amount is your annual taxable income, so it just runs that through the tax brackets and divides by the number of pay periods to get your amount withheld for the specific paycheck. You can then adjust this manually with the additional amount field.

Example:
$50k income, W-4 set as: single filer, 1 allowance, 26 pay periods per year
-$6200 standard deduction
-$4000 personal exemption
= $39.8k taxable income
Tax liability is $5743.75
$5743.75/26 = $220.91 federal tax withheld per paycheck

If you're planning on itemizing deductions more than the standard deductions you might want to take that into account and adjust accordingly.

[teen persuasion]

I'm in the same boat as OP. I've been all over the internet trying to figure out calculations, but I'm still not sure how to update my Husband and I's W-4's. Any clarification would be greatly appreciated.

If you have a two income household it's a little tricky because the W-4 doesn't know how much your spouse makes. If your incomes are similar most likely you'll want to check "Married, but withhold at higher Single rate" on both forms.

The way the W-4 works is it takes your annual income (as projected by an individual paycheck), subtracts the standard deduction (depends on filing status checkbox) and number of allowances times $4000 (for 2015). The remaining amount is your annual taxable income, so it just runs that through the tax brackets and divides by the number of pay periods to get your amount withheld for the specific paycheck. You can then adjust this manually with the additional amount field.

Example:
$50k income, W-4 set as: single filer, 1 allowance, 26 pay periods per year
-$6200 standard deduction
-$4000 personal exemption
= $39.8k taxable income
Tax liability is $5743.75
$5743.75/26 = $220.91 federal tax withheld per paycheck

If you're planning on itemizing deductions more than the standard deductions you might want to take that into account and adjust accordingly.

You also have to compensate for any credits you may be eligible for: retirement savers credit, child tax credits, EITC, tuition credits, etc.  They are essentially payments already made to the IRS.

We claim something like 14 allowances, so DH has nothing withheld for federal.  We owe essentially 0 fed tax, AND get several credits.  Unfortunately there is no way to get the refundable credits until we file, and the nonrefundable ones are useless to us.

State is something else entirely - we are not at zero taxable (stingy exemptions), but with refundable credits will owe no tax.  However we'd need to claim 25 allowances to have nothing withheld, but must stay below 15 per state rules.

[MDM]

See also the thread containing this post http://forum.mrmoneymustache.com/taxes/am-i-witholding-too-much/msg758850/#msg758850 and links therein.

[LibrarIan]

Didn't get online during the weekend. Glad to see some replies today.

You mean "tax refunds".

Yes, I do mean that.

I'm not sure how to change my situation. I can certainly look at what happened in 2014, but I was sort of hoping there would be an "if this then that" type of logic path to follow. Like, if you make x dollars, choose this thing to be withheld.

I make $55k/year and my wife makes about $12k/year. I live in KY but work in OH and she lives and works in KY. This is one area where I just have no clue what things are relevant to tell others so they can help me. I'll check out the link someone posted, but if there are more specifics someone could give apart from "look at your taxes last year" I would appreciate it.

[RWD]

I'm not sure how to change my situation. I can certainly look at what happened in 2014, but I was sort of hoping there would be an "if this then that" type of logic path to follow. Like, if you make x dollars, choose this thing to be withheld.

I make $55k/year and my wife makes about $12k/year. I live in KY but work in OH and she lives and works in KY. This is one area where I just have no clue what things are relevant to tell others so they can help me. I'll check out the link someone posted, but if there are more specifics someone could give apart from "look at your taxes last year" I would appreciate it.

I was more suggesting you should look at how your 2014 taxes were calculated and see what applies to 2015 as a starting point.

Alright, let's look at the federal 2015 taxes for your scenario. I'll be assuming you will file married jointly, have no kids, will only be claiming exemptions for yourself and your wife, and use the standard deduction instead of itemized. I'll also be assuming no pre-tax deductions (e.g. 401k, health insurance, state income tax).

First we'll figure out what your actual 2015 tax liability should be so that we have a target.

Gross income: $67k
Standard deduction: $12.6k
Exemptions: $8k
Taxable income: $46.4k
Tax liability: $6,037.50

Now let's take a guess with the W-4 and see how it comes out. Because your incomes are so different I'm going to guess yours can be withheld as married and then set your wife's to the single brackets.

Husband W-4:
1 allowance, withhold as married
$55k - $12.6k (married standard deduction) - $4k (1 allowance) = $38.4k taxable
$4,837.5 will be withheld

Wife W-4:
1 allowance, married withhold at single rate
$12k - $6.3k (single standard deduction) - $4k = $1.7k taxable
$170 will be withheld

Total withheld from both paychecks for the year: $5,007.50. Okay, we missed our target by $1,030. Using these W-4s your wife's marginal tax rate 10% and yours is 15%. So if we drop both allowances to 0 that will withhold an additional $1000 (4000 * (.10+.15)). That gets us within $30. Now you will have to use the additional amount field. If you have something like 26 pay periods putting "$1" in additional amount field will get you about as close as you can expect. Let's run through the revised W-4s:

Husband W-4:
0 allowance, withhold as married, $1 additional (26 pay periods)
$55k - $12.6k (married standard deduction) = $42.4k taxable
$5,463.5 will be withheld

Wife W-4:
0 allowance, married withhold at single rate
$12k - $6.3k (single standard deduction) = $5.7k taxable
$570 will be withheld

Total withheld from both paychecks: $6,033.50. Of course, don't just go using this example W-4 exactly, as you'll need to adjust for any pre-tax deductions. And since we are already most the way through 2015 you would need to look at how much has been withheld already and compensate for that if it is too low or too high. I'll be happy to rerun calculations if you provide more specific information.


I'm not sure of your specifics with state tax. Do you know which state's taxes you are paying or are you asking for help with figuring that out?

[zephyr911]

I've used Excel sheets to track and forecast my taxable income in the past, with a goal of calibrating my withholding as close to 0 as possible. The best thing you can do is get familiar with the tax return forms so you can do the math in advance.

Screenshots of my sheet for this year are attached. I start mid-year, depending how proactive I'm feeling, and to the YTD numbers I add current and projected ones (this works better if your pay is fairly consistent). In another section, I start with my taxable income (which sums from part 1) and add/subtract all the appropriate numbers (starting with estimates) for Schedule E, C, A (or the equivalent standard deductions) and personal exemptions. (ANG is just an employee expense deduction for travel, etc) The tentative tax number is an equation based on the tax brackets, but you can also just use the tax tables once they're published.

Does this make sense?