While looking at my recent paycheck stub, I began to wonder what is the ideal filing status. For many years, I filed as “Single, claiming 0 deductions”. This would guarantee that I wouldn’t have to pay taxes come April 15. Granted, the IRS was using my money, interest free for the year, but, at the time, it only amounted to about $500/year. I checked with our payroll service and found that, if I changed to a “Married, with 2 deductions” I could take home an additional $25/week. That’s $1300/year! So here’s my question (finally): what would would be the best filing status for me and my wife (who earns more)? I want to be sure to pay the IRS the correct amount of money without risk of underpaying. I hope to go through my working life without writing a check made payable to the IRS.
BTW, I went to the IRS website, but found no useful info. I’d rather hear from a CPA-type on this.
I’m not a CPA but I have asked one. His answer was that the ideal deduction would leave you as near to Zero as possible when it came time to pay taxes. You’ll never be right on but the closer the better. That way the governement doesn’t get your money tax free and you don’t risk a whopper tax bill come tax time.
If you’re REALLY good about saving your money ($25/week can disappear quite easily into stupid stuff) then keeping as much as possible could be an option. That way you get to keep your money earning interest. The downside is this is risky and you WILL have a big tax bill come tax time. Also, if you go too far on this the IRS will hit you with penalties for withholding too much.
As our local tax professional, i recommend just enuf so that you are sure of geting a small efund, and not owing. However, i need to know a few things before I can give a better answer: how much of a refund did you get from 1999 ( ie this years refund from lst years taxes)? Are you both) earning about the same this year? Deductions- similar? And, finally, what did you claim last year- single & 0? Wife? See, if you got only a $500 refund, and info is the same, changing to M&2 would result in you OWING some $1000.
If your refund is about $500, then you “gave” the IRS some big $5 in interest you lost. big whoop. Personally, i feel a nice $500 comes in handy about then- pays off the last of the xmas bills.
But I will admit that those getting refunds in the multiple thousands are not doing the wisest thing.
What would be really useful is to know the formulas the payroll department uses to determine how much bucks they are going to withold for each deduction.
I assume they refer to some published tables or formulas of some sort. Why isn’t this stuff common knowledge?
It is, I forget the # of the Pub (I don’t do as much tax stuff now), but it is available, for free, at your local IRS office. If I remember, i’ll post the Pub #, and you can order by phone.
But it is sorta complicated, so…
The game, as noted by others, is to pay just slightly more than you owe, to get a refund but not a large one.
However, do be careful of the other side. If you have under-withheld, so that you owe a lot more than was withheld, there could be penalties. If your income level is reasonably stable, that’s probably not a problem. However, if your income level is increasing from last year, you might want to be sure that you have withheld this year AT LEAST as much as would have paid all your taxes last year.
In short, in this game, you’d rather have too much withheld and get it back (even if no-interest) than have too little withheld and pay penalties.
I had to pay the last three years (if not more) and never paid any penalties. I would think they’d have noticed if I had owed them penalties. AFAIK, as long as you pay before April 15 and did not take more withholding deductions than you were allowed, there’s no penalty. Maybe if you have big capital gains? Since I have no problem with paying about $500 one last time (it’s same total tax amount no matter how much is withheld), I prefer to keep my money, thank you very much.
Why wait for that extra money when you can use it throughout the previous year? The only reason I can think of is if you can’t force yourself to plan ahead to pay and tend to be a little irresponsible with your finances… ahem… No offense intended, but the reasons most people like refund checks seems silly to me. It’s not like it’s a gift. And if you have credit card bills from Christmas by the time you get your refund, you really should have taken the money from withholding and saved $25 a week (or whatever) for Christmas yourself rather than paying the interest.
Try following the instructions with the withholding form to decide how many exemptions to claim. That’s what the worksheet is for.
If I remember right, there are two ways to stay out of trouble for underwithholding. One is if your withholding covers some percentage ( I think 90%) of your tax bill, and the other is if the amount withheld is at least as much as last years total tax.