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For U.S. Residents: How many allowances should I pick on W-4 forms (http://www.irs.gov/pub/irs-pdf/fw4.pdf)? As I understand it, you can legally put whatever number you want there, and putting a higher number will allow you to net more each paycheck. This would allow you to invest the money and get interest on it, and pay it back on tax day. Suggestions, comments?

Thanks

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zzyzzx said: <blockquote><hr><br>I'm talkin about if you are woefully deficient all year, and then try to make up for it... (more)

frootmall (Jan. 11, 2007 @ 3:52p) |

zzyzzx said: <blockquote><hr><br><br>I'm talkin about if you are woefully deficient all year, and then try to make up fo... (more)

RS4Rings (Jan. 11, 2007 @ 3:57p) |

scott1961 said: <blockquote><hr>zzyzzx said: <blockquote><hr><br><br>I'm talkin about if you are woefully deficient all ... (more)

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I'm thinking

Toadx said: [Q]For U.S. Residents: How many allowances should I pick on W-4 forms (http://www.irs.gov/pub/irs-pdf/fw4.pdf)? As I understand it, you can legally put whatever number you want there, and putting a higher number will allow you to net more each paycheck. This would allow you to invest the money and get interest on it, and pay it back on tax day. Suggestions, comments?

Thanks

While true that you can place anything you want (almost) for your number for deductions, if you owe large amounts of tax for several years in a row, you can be penalized and be forced to do quarterly payments to the IRS. I'm not 100% sure of the details but I know that my plant manager was hit with this for selling a mutual fund to buy a new house and the extra income caused him to owe excessive taxes. YMMV and good luck.

Also, you might have wanted to place this in the "tax" thread at the top of this forum. <img src="i/expressions/face-icon-small-smile.gif" border=0>

OK.

First off, thanks for the wealth of background info.

There are a couple of things to factor.

1. Are you single, married, have kids?

2. Do you itemize or take the standard deduction? If you itemize, how much more do you deduct than the standard?

My case, I am single and itemize. I claim 1 federal, and 1 state.

Sorry, Toad, but there are civil AND criminal penalties which can be assessed for supplying false or fraudulent information on your W4 or "for willfully failing to supply information that would increase the amount withheld". See page 39 of IRS Publication 17.

You can calculate where you need to be to minimize or eliminate your refund check using the calculator on Kiplinger.

Also remember that some states do not allow you to claim more allowances on the state W4 form than you will claim when you file your taxes. So even though you will get a state refund, you cannot claim more state allowances to reduce that refund.

LustfortheMoment said: [Q]Sorry, Toad, but there are civil AND criminal penalties which can be assessed for supplying false or fraudulent information on your W4 or "for willfully failing to supply information that would increase the amount withheld". See page 39 of IRS Publication 17.

Thanks...

[Q]Penalties
You may have to pay a penalty of $500 if both of the following apply.

You make statements or claim withholding allowances on your Form W-4 that reduce the amount of tax withheld.

You have no reasonable basis for those statements or allowances at the time you prepare your Form W-4.


There is also a criminal penalty for willfully supplying false or fraudulent information on your Form W-4 or for willfully failing to supply information that would increase the amount withheld. The penalty upon conviction can be either a fine of up to $1,000 or imprisonment for up to 1 year, or both.

These penalties will apply if you deliberately and knowingly falsify your Form W-4 in an attempt to reduce or eliminate the proper withholding of taxes. A simple error, an honest mistake, will not result in one of these penalties. For example, a person who has tried to figure the number of withholding allowances correctly, but claims seven when the proper number is six, will not be charged a W-4 penalty.

Follow the directions for the W-4 and don't play games with the IRS.

Generally speaking, your tax liability is due ratably over the taxable year, not at year-end.

Failure to pay on a ratable basis will lead to penalties for failure to file estimated tax.

Intentional disregard for the rules and regulations regarding the reporting of income can lead to a negligence penalty, a civil fraud penalty, or penalties under the criminal fraud provisions of the Internal Revenue Code.

This is no game.

Play with fire and you will get burned.

I don't get it. If witholding the legal deduction for state and federal gets you a return of several thousand dollars at tax time what is your alternative for inching that overpayment down to zero besides upping the deductions?

yesnick said: [Q]Follow the directions for the W-4 and don't play games with the IRS.

Generally speaking, your tax liability is due ratably over the taxable year, not at year-end.

Failure to pay on a ratable basis will lead to penalties for failure to file estimated tax.

Intentional disregard for the rules and regulations regarding the reporting of income can lead to a negligence penalty, a civil fraud penalty, or penalties under the criminal fraud provisions of the Internal Revenue Code.

This is no game.

Play with fire and you will get burned.

OMG! Where did you hear that nonsense? You can put however many allowances you'd like to choose. If you don't estimate correctly, you might end up owing taxes at the end of the year..there is the calculator on the IRS web site to help you out. There is nothing illegal about it. It's also based on what you make too. Why would you give the government your hard earn money throughout the year as a free-interest loan?! That's nuts!

rdsgonzo13 said: [Q]yesnick said: [Q]Follow the directions for the W-4 and don't play games with the IRS.

Generally speaking, your tax liability is due ratably over the taxable year, not at year-end.

Failure to pay on a ratable basis will lead to penalties for failure to file estimated tax.

Intentional disregard for the rules and regulations regarding the reporting of income can lead to a negligence penalty, a civil fraud penalty, or penalties under the criminal fraud provisions of the Internal Revenue Code.

This is no game.

Play with fire and you will get burned.

OMG! Where did you hear that nonsense? You can put however many allowances you'd like to choose. If you don't estimate correctly, you might end up owing taxes at the end of the year..there is the calculator on the IRS web site to help you out. There is nothing illegal about it. It's also based on what you make too. Why would you give the government your hard earn money throughout the year as a free-interest loan?! That's nuts!

Because the IRS says that you can only go so far?

[Q]Penalties
You may have to pay a penalty of $500 if both of the following apply.

You make statements or claim withholding allowances on your Form W-4 that reduce the amount of tax withheld.

You have no reasonable basis for those statements or allowances at the time you prepare your Form W-4.


There is also a criminal penalty for willfully supplying false or fraudulent information on your Form W-4 or for willfully failing to supply information that would increase the amount withheld. The penalty upon conviction can be either a fine of up to $1,000 or imprisonment for up to 1 year, or both.

These penalties will apply if you deliberately and knowingly falsify your Form W-4 in an attempt to reduce or eliminate the proper withholding of taxes. A simple error, an honest mistake, will not result in one of these penalties. For example, a person who has tried to figure the number of withholding allowances correctly, but claims seven when the proper number is six, will not be charged a W-4 penalty.

MisterMe said: [Q]I don't get it. If witholding the legal deduction for state and federal gets you a return of several thousand dollars at tax time what is your alternative for inching that overpayment down to zero besides upping the deductions?

You CAN legally increase the number on you W-4 as high as needed to minimize your refund (and comfortably withhold just enough to pay your estimated tax). That's what the calculator on the IRS site helps you do.

LustfortheMoment said: [Q]Sorry, Toad, but there are civil AND criminal penalties which can be assessed for supplying false or fraudulent information on your W4 or "for willfully failing to supply information that would increase the amount withheld". See page 39 of IRS Publication 17.Sorry I thought there was no problem with putting any number you want for allowances. I've even seen tax tools that calculate how many allowances you should put based on how much of a tax refund you get (and try to maximize your take home pay without underpaying). How was I supposed to know? They expect everyone to read the entire IRS Publication 17? Oh well, it probably wouldn't be worth the trouble anyway. Thanks for the info.

Toadx said: [Q]LustfortheMoment said: [Q]Sorry, Toad, but there are civil AND criminal penalties which can be assessed for supplying false or fraudulent information on your W4 or "for willfully failing to supply information that would increase the amount withheld". See page 39 of IRS Publication 17.Sorry I thought there was no problem with putting any number you want for allowances. I've even seen tax tools that calculate how many allowances you should put based on how much of a tax refund you get (and try to maximize your take home pay without underpaying). How was I supposed to know? They expect everyone to read the entire IRS Publication 17? Oh well, it probably wouldn't be worth the trouble anyway. Thanks for the info.

It's not illegal...

But if you do not estimate properly the amounts that should be withheld and when you do your taxes you owe more than a specified amount (believe its $1,000) you will be subject to a 10% penalty.

Also when you make additional income (cashing out 401k, selling home, stocks, etc..) you are supposed to make a early estimated tax payment with the government to avoid any tax penalities for not withholding enough.

www.bankrate.com = your friend
www.irs.gov = your friend

Have fun! <img src="i/expressions/face-icon-small-smile.gif" border=0>

I already posted this exact same thread...

We claim 0...no dependants...

A coworker decided to claim his 4 cats as dependants...

He got audited and ended up owing the IRS close to 100K...

Do what you want to, but be able to sleep at night!

chatterweb said: [Q]A coworker decided to claim his 4 cats as dependants...
His cats have a SSN or an ITIN?

Hey, they gave me an SSN...ok, ok, I've never met a cat that could type.

So many 'fear factor' type posts. Yes, the tax system is in fact a game, and there are rules, and there's just some horrid advice above. If y'all are so scared why not just have Uncle withhold the whole check and get a refund in January? That way you would 'know' you're safe. nah, don't go read the rule book and find out the safe harbor provisions or figure some of the workarounds.

[Q]but I know that my plant manager was hit with this for selling a mutual fund to buy a new house and the extra income caused him to owe excessive taxes.

Had to be other factors involved. If he paid in 100% (110% if he makes over ~150k) of last years taxes he wouldn't have been penalized.

[Q]Generally speaking, your tax liability is due ratably over the taxable year, not at year-end.

Failure to pay on a ratable basis will lead to penalties for failure to file estimated tax.

Of course the 'penalty' is simply interest. Been there done that. It wasn't even that a bad rate when I did it. It wasn't on W-2 income though. Also if there is withholding at any time during the tax year it counts as 'paid on time' So yes you can pay all your tax due in one lump sum on the last day of the year as long as you cand find a way to have it withheld.

[Q]But if you do not estimate properly the amounts that should be withheld and when you do your taxes you owe more than a specified amount (believe its $1,000) you will be subject to a 10% penalty.

Also when you make additional income (cashing out 401k, selling home, stocks, etc..) you are supposed to make a early estimated tax payment with the government to avoid any tax penalities for not withholding enough.

Care to back up that 10% penalty claim? Think you're confused with premature withdrawals from a qualified account. Safe harbor provisions cover the second incorrect assertion.

[Q]A coworker decided to claim his 4 cats as dependants...

He got audited and ended up owing the IRS close to 100K...

That would be on his 1040, would be blatant criminal fraud, and really has nothing to do with the discussion at hand.


chatterweb said: [Q]We claim 0...no dependants...

A coworker decided to claim his 4 cats as dependants...

He got audited and ended up owing the IRS close to 100K...

Do what you want to, but be able to sleep at night!

Your coworker is a moron.

chatterweb said: [Q]We claim 0...no dependants...

A coworker decided to claim his 4 cats as dependants...

He got audited and ended up owing the IRS close to 100K...

Do what you want to, but be able to sleep at night!

then clearly he was much much more crooked then claiming cat children

I claimed 9 when I was a dependent student.
The penalties sited are minimal considering the likelyhood they'll be enforced.

Someone said "don't play games with the IRS"??? Um, it IS a game. If you don't know that you're losing. I want to learn more about how the "smart money" treats the IRS, corporations, those guys who hired Gene Hackman in the FIRM, ect.

Claim Zero.

MyWallet012 said: [Q]Claim Zero.
agreed.

Boo to claiming 0 unless you can't be trusted with your own money.

WalStMonky said: [Q]Boo to claiming 0 unless you can't be trusted with your own money.
I am very good at managing my money and I claim 0. Your making a blanket statement that will not fit all. If you know you are going to have reported income from things like 1099 INT or investments, claiming 0 can help offset the taxes on those gains and eliminate potential penalties

If you're single ALWAYS pick ZERO. You'll get the biggest refund and you won't get stuck paying Uncle Sam on April 15th.


Jimmy, the idea is NOT to get the biggest refund. You should OWE the IRS money on April 15. Why give Uncle Sam a free loan for the year???

LustfortheMoment said: [Q]Jimmy, the idea is NOT to get the biggest refund. You should OWE the IRS money on April 15. Why give Uncle Sam a free loan for the year???

Agreed. For those claiming 0 and getting a large refund every year, I ask you - if your employer gave you a raise that would increase your take-home pay by $300/month, but gave you the option to let them hold on to it for you (interest-free) and instead give you a $3600 check after the end of the year, which would you choose? Those that claim 0 and get big refunds are essentially choosing the latter. But if you pyschologically need that nice "tax refund bonus" every year, then by all means go ahead and always claim 0. Personally I'll take my money now when it is worth more.

LustfortheMoment said: [Q]Jimmy, the idea is NOT to get the biggest refund. You should OWE the IRS money on April 15. Why give Uncle Sam a free loan for the year???

Agreed. Throw that money into your high-interest rate savings for risk-free gain. If I recall correctly, don't put over 10 exemptions or you will have send some proof. Also, if you're a very high-income earner, you may have to pre-pay taxes, which will affect the number of exemptions you should put in.

choosing 0 does NOT avoid penalties. You are choosing what you think will be the lesser penalty.

I just had a friend take economics 101 and in the textbook it listed a large tax refund as evidence of poor tax planning.

You just won't get into real trouble for claiming 9, or does someone have actual personal experience to to contradict that?


This W4 calculator was useful for me for 2005. It hasn't been updated for the 2006 tax year yet.
Intuit's W4 analyzer

I'm surprised by the amount of misinformation on this thread. I thought this was common knowledge among FWers. Here is the correct answer to your question:

It's true that you can choose any number you want for the number of allowances. However, generally speaking, if you owe too much tax when you file your return (due to claiming too many allowances or for any other reason), you will owe penalties and interest. For most people, you will avoid penalties and interest if you owe less than $1,000 when you file your return or if the amount of tax withheld over the course of the year was greater than or equal to your total tax liability for the previous year. (I think you have to pay at least 110% of the previous year's tax liability to avoid penalties if your AGI is over $150,000.) See IRS Publication 355:

IRS Publication 355

For practical purposes, what you're proposing will work, but only in special circumstances. You can get away with it only if your tax liability will be much greater one year than it was the previous year. For example, I deliberately claimed too many allowances on my W-4 for 2006. I won't owe any penalties or interest, since I was a postdoc for most of 2005, so my salary (and hence my tax liability) was low. In 2006, I got a new job that paid over twice what I earned as a postdoc. Even though I didn't have nearly enough tax withheld, I won't owe any penalties or interest, since the amount that was withheld was greater than my total tax liability for 2005. I banked all the money that should have been withheld throughout the year, and I'm earning interest on that money. I'll have a monster tax bill this year, but I'll be able to pay it off without a problem, and I won't owe penalties or interest. However, I am decreasing the number of allowances I claim this year, since my 2006 tax liability will be much greater, so I won't be able to get away with this in 2007. (Well, I suppose I could in theory, but the penalties and interest I would owe would almost certainly be greater than the interest I would earn.)

In theory, I think one might be able to claim too many allowances and then pay estimated taxes to avoid any penalties. As far as I know, the IRS will let you do that as long as you meet one of the "safe harbor" criteria that I listed above. However, given that estimated taxes are due every 2-3 months, I would think this would be a bigger hassle than it's worth. (Moreover, if you did this for a long enough, the IRS might want to take a closer look at your return. Even if you're not technically breaking any rules, having the IRS take a closer look at one's return is never a good thing.)

Edit: One can also avoid paying penalties and interest if one pays at least 90% of one's total tax liability through withholding, as others noted below. I forgot about that particular safe harbor. However, since the question was whether or not one could withhold too little money (presumably much less than 90% of one's tax liability), it's probably irrelevant here.

rdsgonzo13 said: [Q]yesnick said: [Q]Follow the directions for the W-4 and don't play games with the IRS.

Generally speaking, your tax liability is due ratably over the taxable year, not at year-end.

Failure to pay on a ratable basis will lead to penalties for failure to file estimated tax.

Intentional disregard for the rules and regulations regarding the reporting of income can lead to a negligence penalty, a civil fraud penalty, or penalties under the criminal fraud provisions of the Internal Revenue Code.

This is no game.

Play with fire and you will get burned.

OMG! Where did you hear that nonsense? You can put however many allowances you'd like to choose. If you don't estimate correctly, you might end up owing taxes at the end of the year..there is the calculator on the IRS web site to help you out. There is nothing illegal about it. It's also based on what you make too. Why would you give the government your hard earn money throughout the year as a free-interest loan?! That's nuts!

I get that nonsense from 10 years of experience as a tax specialist for Fortune 100 companies and 5 years of experience as an IRS agent.

You are totally irresponsible for providing that kind of false garbage advice to people looking for assistance.

Would you like to cite the basis for your moronic rantings?

Please provide your social security number so that the IRS can reward you for your fine community service.

Thanks to BigFish, I didn't really get that when my accountant explained it but it makes sense now.

If someone has real experience getting penalized, or not, I would be interested to hear it.

So if we can make %5 in the bank and we might be penalized %10 am I wrong that your risking the same penalty your guaranteed to suffer if you don't keep the money? Is there some other reason we should be afraid?

Following article somehwat contradicts few things written in this thread..
Text
As I understand from this article,
it is okay to withhold more at the starting of the year as far as you meet certain requirements by the year end (called safe harbor in the article).

To highlight a point from article,
If you're paying through withholdings, they are deemed to be paid evenly during the year, regardless of when they are remitted.

may be yesnick can shed some more light on what is missing here or more exactly, what I have misunderstood.

I had also given the link in some other thread but did not get any response.




skepticShopper said: [Q]Following article somehwat contradicts few things written in this thread..
Text
As I understand from this article,
it is okay to withhold more at the starting of the year as far as you meet certain requirements by the year end (called safe harbor in the article).

To highlight a point from article,
If you're paying through withholdings, they are deemed to be paid evenly during the year, regardless of when they are remitted.

may be yesnick can shed some more light on what is missing here or more exactly, what I have misunderstood.

I had also given the link in some other thread but did not get any response.
There are two different issues. Although they are related, you must not confuse them.

Issue #1: Underpayment of tax.
You may owe a penalty for underpayment of tax if you do not pay enough during the course of the year at the right times.

For purposes of determining whether you owe this penalty, there are several exceptions known as "safe harbors." These include (1)paying 90% of the current year's taxes (2) 100 or 110% of last year's taxes (depending on last year's AGI) (3) paying using the Annualized Installment method. Meeting any one of these safe harbors will avoid the penalty provided that the payments are made in a timely manner. For purposes of determining whether the payments are made in a timely manner, you have the option of treating all withholding as having been made in four equal installments on the installment due dates, regardless of when the withholdings were actually taken.

So, for example, a wealthy client of the author of the article who has a large capital gain in January might be able to arrange to have a big payment taken out of his December salary and avoid underpayment penalties.

Issue #2: False declarations on Form W-4.
You sign Form W-4 under penalty of perjury declaring that the statements you have made are true to the best of your knowledge. There is a civil penalty of $500 for making a false statement and there are potential criminal penalties for making a false statement. This is completely separate from the underpayment penalties described above. You may be held liable for making a false statement in addition to underpayment penalties and you may be held liable for making a false statement even if you manage to avoid the underpayment penalties.

You are expected to have a reasonable basis for claiming the number of allowances you select on Form W-4. This includes dependents, deductions, anticipated annual income, etc.

PLEASE READ THIS STATEMENT CAREFULLY: <font color=white style="background-color: #3E3E3E;">The number of allowances you claim on your W-4 is not expected to equal the number of dependents you can claim on your 1040. It may be higher or lower than the number you expect to claim on your tax return. You just have to have a reasonable basis for it. The IRS provides a worksheet in the W-4 instructions and an online calculator to help you determine a reasonable number. Several other web sites also provide good calculators.

Wanting to wait to earn interest on the taxes due on your salary is not a reasonable basis.

Now it is true that you are unlikely to be caught if you falsify your W-4 but have a lot withheld in Decemeber. But it does happen. Since the IRS dropped the QW-4 (Questionable W-4) program about a year ago, they have replaced it with a more agressive program of W-2 checking. If something goes wrong with your plan, they will come down hard on you. For example, let's say you reduce your holding to zero for the first six months of the year, planning to bump it up at the end of the year. But, unfortunately, you lose your job in the middle of the year or your company is sold to another corporation or your division is spun off. You'll get two W-2 Forms for the year. The first one will show zero withholding for a large salary. Yes, you'll be able to avoid the underpayment penalty by having more withheld from your second employer, but that tell-tale W-2 for the beginning of the year will still alert the IRS to what you've been pulling and result in penalties for falsifying your W-4.


Again, no one is saying you should overpay your taxes or get a large refund. No one is saying you can't claim a lot more allowances than exemptions. Just play by the rules and pay the least tax that the rules allow. Don't get greedy and cross the line. You may get away with it for a while, but you when your number comes up, you will lose more than you gained.

I am not sure how common the option is, but at one of my previous employers they let me pick the withholding percent. I figured out what would minimize the disparity in the tax bill and went with that number. The only problem I faced is that the state thought I hadn't paid at all since I used the same percent as my federal withholding and they thought that because the two numbers were the same that somehow they didn't get anything.

Toadx said: [Q]They expect everyone to read the entire IRS Publication 17?This is my favorite "you must be an idiot" post of the day. Tell me, how much money will you pay to the federal government over your lifetime? And you can't take the time to flip through a tax guide? The more you know about taxes, the better you can plan, and yes, the less you will pay!

Your Federal Income Tax

yesnick said: [Q]rdsgonzo13 said: [Q]yesnick said: [Q]Follow the directions for the W-4 and don't play games with the IRS.

Generally speaking, your tax liability is due ratably over the taxable year, not at year-end.

Failure to pay on a ratable basis will lead to penalties for failure to file estimated tax.

Intentional disregard for the rules and regulations regarding the reporting of income can lead to a negligence penalty, a civil fraud penalty, or penalties under the criminal fraud provisions of the Internal Revenue Code.

This is no game.

Play with fire and you will get burned.

OMG! Where did you hear that nonsense? You can put however many allowances you'd like to choose. If you don't estimate correctly, you might end up owing taxes at the end of the year..there is the calculator on the IRS web site to help you out. There is nothing illegal about it. It's also based on what you make too. Why would you give the government your hard earn money throughout the year as a free-interest loan?! That's nuts!

I get that nonsense from 10 years of experience as a tax specialist for Fortune 100 companies and 5 years of experience as an IRS agent.

You are totally irresponsible for providing that kind of false garbage advice to people looking for assistance.

Would you like to cite the basis for your moronic rantings?

Please provide your social security number so that the IRS can reward you for your fine community service.

Well then go ahead and give the government an interest free loan for a year then. Won't hurt my feelings

Skipping 39 Messages...
scott1961 said: [Q]zzyzzx said: [Q]

I'm talkin about if you are woefully deficient all year, and then try to make up for it with one estimated payment at the end of the year. If they bothered to look and see that you were deficient for the first quarter, they would penalize you and stick you with interest charges.
With estimated payment you would get penalized, The trick is to do it thru regular pay roll deduction. If you could swing that you could pay on the last week of the year and IRS would not know
Let me emphasize that the issue here is not "the IRS would not know."

The issue here is that the law explicitly instructs the IRS to treat that withholding as if it were made in four equal installments throughout the year for purposes of calculating the underpayment penalty (unless you elect otherwise). You are not pulling one over on an ignorant IRS. They are simply following the law.



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