W-4 Questions

[Brettster]

I recently started a new job making 70k a year and heard that I should claim more allowances on the W-4 so that my tax return is close to zero dollars as possible so that I can earn interest on the money. I'm currently single,no kids, renting. I was thinking of claiming 5?

[punkass]

I rent, no kids, single....pretty much job and standard deduction (with miscellaneous interest income).

I claim 2 and I owed 40 bucks. But I make a little less than you. Your situation is obviously different, but I think 5 is too much. Probably 2 or 3 is in the range.

[Nomad84]

5 won't be nearly enough for zero withholding. There is a calculator on the IRS website that you can use to calculate the "correct" numbers, so I'd recommend using it later in the year. When my salary was $40k, it took something stupid like 14 allowances to stop them from withholding anything. For 70k/year, it will take more like 20+. Just make sure you are actually putting the money into savings instead of spending it. As long as you hit the minimum withholding by the end of the year you shouldn't get any penalties. I think you just have to meet one of the following:

1) total withholding at end of year > 90% of total tax liability
2) total withholding at end of year > total tax liability from previous year
3) ???

You should be able to look up the rules pretty easily, but if your pay is increasing each year, just make sure you pay at least as much as you had to pay the year before. Pay the rest in April.

BTW, to figure out the number of allowances to take, I think you just take (salary - standard deduction)/(amount of each allowance), so if you can find those numbers for this year, it should be simple. Besides, if you just add a couple more allowances, you can be sure you won't have any withholding.

I think you are supposed to expect this withholding to be sufficient at the end of the year, but if you change your mind about wanting to donate your entire salary to charity, you just change your withholding late in the year.

Where I work, we can change our withholding allowances online, but the web app only allows us to go up to nine. I got some strange looks asking around to see how to make it 14, but I finally found out where to go to do a hard copy and got it done.

[Nomad84]

Just to be clear, since I'm not sure we're talking about the same thing...

1) Claim a ton of allowances so you have zero withholding.
2) Place tax money in savings account/money market fund.
3) Change W-4 late in the year to withhold all or most of your pay. Use money from savings for your expenses.
4) In April, pay the rest of the taxes you owe.

By doing this, you earn interest on your tax money as long as possible. It's an interest free loan from the government. You do have to have a certain amount of money withheld before the end of the year to ensure that you don't get hit with penalties. I don't remember the criteria here, but you can look them up. If you withhold at least as much as your total tax liability last year, you'll be fine. Again, make sure you get your final payment in by the deadline in April. Short version:

1) Borrow money from the government at 0%
2) Use the money for risk free investments
3) Profit

[Brettster]

Nomad, regards to changing my w-4 late in the year, so if I had 9 allowances at the time, change my w-4 to zero allowances?

[Big TR]

If you have 9 allowances for most of the year, you are going to have to change to 0 allowances plus have your employer withhold additional money.

[Jimbo]

Knowingly claiming more deductions than you are allowed by IRS regs is comitting fraud, no matter if you make up the tax due by the end of the year or not. Best to read the fine print on the form before you sign off on a fradulant W-4. A good HR department will not allow you to do this in the first place.

Jimbo

[jaydub]

[ QUOTE ]
Short version:

1) Borrow money from the government at 0%
2) Use the money for risk free investments
3) Go to jail for tax fraud?

[/ QUOTE ]

Not sure of the actual risk of prosecution but this link should be required posting with any such advice:

The mission of the Withholding Compliance program is to ensure that taxpayers who have serious under-withholding problems are brought into compliance with federal income tax withholding requirements.

I'm not saying it's illegal, all I'm saying is that the quick google hits to support this are the same nutters ranting about taxes being optional and the IRS appears to have a program to stop such activity.

J