How do all these people owe money on their taxes?

Factual Questions
1

Being that it’s tax season and several people are complaing about oweing money, or not getting back enough, one thing struck me:

I have always gotten money back. When I started my jobs, I filled out all those forms ahead of time saying how I file and what deductions, if any, to apply when taxes are taken out. So how is it that other people owe money if in theory their employer is taking out what they said would be taken out? Obviously, I understand the case of self-employed people or owning a business, I’m just referring to people with an employer that takes out taxes from each paycheck. Are the people who owe money only the self-employed? Are their employers that don’t take out taxes? Do some people not fill out the forms right? Please, enlighten me.

2

For many of them (ahem) it would be a combination of deductions not being enough (ahem) and non-office income like freelance writers.

3

The withholding schedules assume a certain amount of deductions and expenses. For people who don’t have that amount, the amount you owe in taxes won’t match the estimates.

We’ve always had regular jobs from regular employees, and we’ve pretty much accurately been able to guess our income for the next year. But some years we’ve had huge deductions, so we’ve gotten a big refund, while other years, few deductions, small refund.

Then there are many people who minimize the amount withheld, so they have more take-home pay. Commissioned salespeople, especially, often reduce their withholding so the checks will be bigger during lean periods, and hope they’ll have a big commission when it’s time to pay the taxes.

4

Sometimes, it’s because of what they declare. When I worked construction, many of my laborers (who were in many ways better compensated than me, their boss… without the job security) would claim 99 dependents. Their reasoning was that they could stash the money away and collect interest on it (or find ways for it to make more money illicitly…), since the government doesn’t factor that in; the government does, however, benefit from having your money in its pocket throughout the year. Other factors are whether one benefits from child credits, real estate credits, and so on. There’s also location. Location, location, location. If you live in a tax-hungry area like mine, you get crushed. My counterpart at work routinely receives several thousand back as a refund, while I owe a massive lump because (a) he has 2 kids, (b)he owns and I rent, and © he lives in PA, while I’ve been sentenced to the hellhole known as New Jersey!

5

In addition to the previously mentioned causes, if one gets extra money that is not subject to withholding, you have to pay up. It was taxed as capital gains, but when we sold a piece of property that we’d been renting out, we had to pay tax on the increase in value over the years, including the depreciation we’d been deducting before.

When I first went back to work, this pushed us into a higher tax bracket for state taxes; they went from 3% to 6%. :eek: Both employers had been withholding at the 3% rate.

When my husband retired, he was entitled to a cash payout for a portion of his accumulated unused sick and vacation time from the 40+ years he’d worked for the state. That all came at once we had to pay tax on that unexpectedly.

Accountants have told me that the ideal is to come out owing a little bit. That means you haven’t given the gummint free use of your money for a whole year, but you aren’t having to undergo major pain to come up with the difference. If we had extraordinary self control, the ideal thing would be to NOT have anything withheld and to invest or bank the amount that SHOULD have been withheld, and gain the interest throughout the year while still having all you need to pay the tax in April. However, for most of us working for wages that is not feasible, and the government obviously does everything it can to be sure of it.

6

One of the standard reasons is that people receive money somehow tax free during the year, and now they have to compensate Uncle Sam. I don’t think the majority of people understand that when money changes hands Uncle Sam get a cut of the action. I have known several people that received a ton of money in capital gains or dividends and they just assume that is “their” money. Uncle Same straightens them out on the rules fairly quickly.

7

Funny enough, my income is generally split between real “employment” (for which I get a W2) and self-employment. I get a fair amount of money for gigs and such that doesn’t get taxed when I get paid. Funny enough, the expenses associated with maintaining my career as self-employed musician have always been high enough that instead of paying taxes on my music income, I end up getting money back from my ‘day jobs’.

But, if I were actually making more profit I would have to pay taxes at this time of year.

8

Is this legal? If so, why don’t more people do it?

9

My understanding is that when I finally get a full time job I’ll owe, because they withhold assuming you have kids and a house. I have neither. Therefore, if I don’t tell them some certain amount to take out on that crazy form I don’t understand when I start the job, I’ll owe.

10

For USA taxes, this is partly correct, but not completely.

And this is pretty much just wrong for USA taxes, at least in every company I’ve ever worked with, or any payroll calculation software I’ve ever used or seen.

In fact, the basic assumption is that you will be using the standard deduction, and that will have no itemized expenses. If you do itemize expenses, it’s usually because you have more expenses than the standard deduction, so you would get more money back instead of less.

You should not be under or over withheld just because you do or do not have kids or a house, or and you normally won’t be under-withheld if you have non-standard expenses.

Warning: Long boring post about tax calculation ahead. Do not read this post while operating heavy machinery!

I write payroll programs, and so I’ve written the programs that employers use to calculate the taxes withheld from paychecks. My customers are mostly smaller (up to a few hundred employees) so it’s possible things are different in larger companies, but I don’t think so.

Withholding is calculated based on what you tell your employer on your W4 and a withholding table issued by the taxing authority. For Federal Income Taxes, the tax table is in a booklet called “publication 15”, commonly known as the “Circular E” which is sent by the feds to employers every year, and which includes withholding tables for that year. States that have income taxes have similar booklets they send out to employers in their state.

With the info from the W4 and the tax table, you take the gross wages, subtract the standard deduction different for married and un-married filers), subtract any exemption amount allowed per dependant, and that’s the taxable wage. Find that wage in the table, and there is your tax.

That is for the Federal Income Ta. States have many minor variations in the tables (some have the standard deduction included, some have multiple columns for differing numbers of dependants, etc.) but for the most part they follow this pattern, or they use some scheme like a percentage of the Federal Tax.

If you fill out your W4 form correctly, and do in fact use the standard deduction and file using the same status and dependants as declared on your W4, you’ll come out very close at the end of the year.

So what does cause under-withholding? Mostly things that the other posted mentioned. Your W4 is incorrect or out of date. You get other income that is not subject to withholding. You have a two-income household and have not correctly changed your W4 to compensate (this is tricky, and requires some knowledge of the tax tables to make it come out right), or your employer is simply not following the withholding table correctly. It does happen.

For help figuring out what your put on your W4 (and you can update it any time, just tell your employer your withholding status may have changed, and you want to update your record), here is an online withholding calculator you can use to estimate your taxes.

11

People with two jobs can get fouled up – they may fill out the first W-4 correctly but then simply copy the same number of exemptions on the form for the second eimployer. The employee withholding tables account for the exemptions and standard deduction but you don’t get a set of exemptions and deductions for
each job. And the additional job may move you into a higher marginal tax bracket, which isn’t accounted for in the withholding tables.

12

Of course, if you can do so without penalty, you WANT to owe money at tax time. If you paid it before you had to, you gave the government an interest free loan out of your pocket. This presumes that you are aware that you will have to pay the tax when you make out your return, and have arranged to be able to do so. If you got a large one-time gain while earning the same amount of normal income you did the previous year you may very well not have penalties. IIRC, if you prepaid 110% of your previous year’s taxes, you do not incur penalties. For many people, this keeps them from having penalties when they wind up with a walloping great tax bill on a windfall. Of course, if they are going to get another one the next year, they should become familiar with estimated tax payments.

13

If you owe a large amount at tax time, the IRS will make you pay quarterly estimated tax the next year. If you get a huge amount back, they don’t like that either. However, since you’ve been so generous as to give them an interest-free loan, they probably won’t hassle you over that.

At most employers, you can tinker with the withholding formula. If you consistently get big refunds, you can tell payroll that you have more or fewer deductions than you will actually claim at tax time. So, they’ll withhold a bit less or more. You can even tell them “single and zero plus $30 a week,” if that’s what it takes to withhold very close to what you actually owe.

I worked with some people with no will power. They said the only way they could save any money was to get a big tax refund. They would dick around with the formula at payroll so way too much tax was withheld. It’s an expensive way to save, but it’s your call.

Payroll told us you could arrange withholding for married and twenty dependents. Any more, and the tax folks would come see you.

14

I clain six exemptions on my pay. I would rather write them a check for a couple of hundred bucks than let them sit on my money.

Last year, I claimed like 8 exemptions and gave myself an interest free 1500 dollar loan from Uncle Sam.

15

I know quite a few people who are of the “don’t give that gol-durn gubmint any more money than they alreddy have consarn it spit tobacco chaw” and feel like to them it’s better to not give the govt a “interest free” loan. they would rathe r pay at the end of the year.

My issue is, I am terrible with money. If left to my own devices, I would say “yes I will put away 22% of my income to pay the IRS when the time comes” but then i’d find some magic beans or shiny glass baubles to spend my money on, thus having to come up with 2k or so on April 15th. THat to me is a nightmare. I’d rather get some back and let the govt live “interest free” on my 2k than have to sell a kidney come tax time.

16

It is leagal. However, If you owe the feds over about $3000. They will charge you a penalty (interest on what they think you should have been paying). The rules are complicated. Yabob spells out some of the rules about when the penalties don’t apply.

In general if you have a husband and wife both working it is a lot harder to get the W4 forms setup so that just the right amount of money is withheld. Also with bonuses unexpected income etc. it is hard to plan correctly.

If you have a lot of income that is not coming from your employer you are supposed to fill out quarterly estimated tax payments. So that government gets its money on time.

17

I have the simplest taxes possible except that I work multiple jobs, and I’ve never really understood that W4 form. Neither do the people who are there hiring me when I fill it out, either, in my general experience. :slight_smile: So, to correctly use that W4 form properly, I should come in knowing how many dependants I have (none) and how much more than standard I want them to take out, right? I guess what I don’t understand is how do I know what percentage they’re taking out already?

I guess my understanding of taxes, like a lot of people’s, comes from my parents, who tell me things like “They assume you have a house and kids!”, but hell, my folks have a whole convention of accountants who work on their taxes! So how on earth do I expect them to know what they’re talking about?

18

I dunno, I barely pay taxes.

(Mustn’t gloat, mustn’t gloat)

19

Here in CT we have a lawyer who has a TV ad in which she says she will settle your tax problems for $20.

I assume she gets lots of bites.

She looks honest. :rolleyes:

20

It’s interesting that you portray the people who are doing the intelligent thing as ignorant hicks, while you yourself admit you can’t manage your money.

Generally, I try to withhold just enough so I won’t get a penalty. This year I got a $47 penalty, so I was just a little too greedy. To put the withholding issue in perspective, I’ll usually break it down into monthly payments - like someone says, “Great, I’m getting $1200 back this year.” That’s good, but he could have given himself a $100 a month salary raise instead.