How does tax withholding work?

General Questions
#1

For the last few years, I’ve gotten a nice refund on my taxes. My question regards why I get a refund at all.

My withholding perfectly matches my actual tax filing in regards to dependents and using the standard deduction. My week-to-week pay is stable, except for maybe a raise in the middle of the year and a possible one-time bonus at some point. This is all calculated by computers… why can’t they get it spot on? I’d rather have the money when I earn it than wait a year for the gov’t to give it back.

#2

And have you noticed…your money, they have it…they do NOT pay interest.

Now, try withholding it from them and see the penalty and interest charges kick in

#3

Perhaps it’s figured on the the worst case senaro, if you weren’t elegible for any deductions at all this would be how much you owe.

Below this point is my personal opinion…

Or perhaps you could look at it this way. If you personally (instead of Uncle Sam) were incharge of gathering withholdings for workers. Would you:
1 - withhold the exact amount.
2 - withhold more then the exact amount.
3 - withhold less then the exact amount.

Now factor in that you are (in this example) Uncle Sam.

If you withhold #1 then some will have to pay a little and some would get a refund (as you would not hit it exactly for everyone.

If you withhold #2 then you get use of this extra money intrest free until you have to issue a refund, have the benefit of people thinking you are good in giving a people a check once a year for a significant amount (having set it up so they never really see the gov’t taking the money throughout the year, people just figure they are getting paid the net, not gross).

If you withhold #3 they you have to depend on people to save enough to pay the taxes and people will get pretty pissed if they really knew how much they are paying to Uncle Sam, this will make them realize that not only are they paying but have been paying over the year.

#4

For one thing, recent years have seen tax reductions which take place mid-year; this is not acounted for in withholding. For another, it’s the IRS policy to withhold a little more than is actually required. Although this results in a little interest income for the government, the main purpose is to create refunds, which keep the taxpaying public cheerful and cooperative about withholding and taxes in general.

#5

You could claim an extra dependant/deduction with your employer. This would result in less withholding. Just be sure that 90% or more of the taxes owed are withheld. Otherwise there is a penalty.

Withholding didn’t always exist. I’ve read that in the early days, before WWI I believe, you just paid up at the end of the year.

#6

IIRC it’s legal to claim an extra dependant on your W4 to lower your withholding, and just pay the difference at tax time.

#7

You can diddle with the number of exemptions on your W-4 form to tune the amount of withholdings (some tax renegades put 99 exemptions). Submit a completed form to your employer.

The actual taxes paid depends on not just your income but the number of dependents you claim and whether you itemize, etc., etc

#8

When first read the OP I thought “Aha! Itemizing is the culprit!”

Then I re-read it and found that SmackFu is using the standard deduction.

In this case I would guess that the IRS withholds a little more than they need every time, just to be “safe”. “Safe” meaning they don’t get shorted (heaven forbid!) and you get a wound-healing refund at the end of the year.

My experience has been that if you are accurate on your W-4 and use the standard deduction they usually get it pretty close. I’m single and after selling my house in 2001 I had to use the standard dedcution this year. Result: I owe the feds $150 on April 15th. This is within 1.2% of what I actually owe, which tells you two things:

  1. With only myself and the standard deduction, the IRS withholding is pretty close.
  2. With only myself and the standard deduction, I get punished in taxes.
#9

The OP also mentioned a bonus, and bonuses usually have a higher withholding amount than a standard paycheck. My method is to change my W-4 before the first paycheck of a new year and claim 9. Then change it back to 2 after the first three checks. I wind up owing about $500 on April 15, but I have the money, I’ve earned the interest on the money, and there’s no extra fee to let the IRS wait four and a half months (as long as it’s less than a $1000). Beats me waiting for them to send my money back. Plus, it usually takes them about three weeks to cash the check when I send it on April 15, so I really don’t pay until the first week of May.