Two questions about our (US) current tax system

[fumster]

@Nobody

As far as I know you can change the number of dependents, or have an additional amount of money withheld, but I’ve never heard of being able to have no taxes withheld.

w4:

7 I claim exemption from withholding for 2010, and I certify that I meet both of the following conditions for exemption.
● Last year I had a right to a refund of all federal income tax withheld because I had no tax liability and
● This year I expect a refund of all federal income tax withheld because I expect to have no tax liability.
If you meet both conditions, write “Exempt” here

[Apex_Rogers]

@sh1bu1

w4:

You’re technically correct that it’s possible to avoid having part of your paycheck witheld, but this is for people who do not owe taxes and so receive all of their witholdings back as their refund. It isn’t a very common case nor an example that relates to the situation in the OP.

[MikeS]

@Munch

False. They can, in fact, take out whatever they (as approved by you) feel like taking out. The government has never said, “You must take out X%” (or more accurately, “a certain percentage as per this handy marginal tax chart”). They say, “you know, it would be really convenient for the government and your employers if you withheld income taxes along with the required social security et al. from their paychecks, because come next April, they’re unlikely to have X% (or more accurately…) laying around to send us”.

If an employee decides “hey - you know, I WILL have X% laying around in April, because I have better things to do all year with the money I’ve earned then send it to government for them to earn interest on instead of me. I’m going down to Human Resources and telling them my wife just had octuplets and to stop taking any income tax out of my paycheck”.

This is incorrect, at least according to the IRS (bolding mine):

The United States income tax is a pay-as-you-go tax, which means that tax must be paid as you earn or receive your income during the year. You can either do this through withholding or by making estimated tax payments. If you do not pay enough tax, you may have to pay a penalty for underpayment of estimated tax.

Search the IRS website for the phrase “pay-as-you-go” for more information.

[Rand_Rover]

@Nobody

For a number of reasons I do not like our current tax system, which probably won’t change any time soon. However, I have a question about if it is possible to change two aspects of it. They are related, but different enough that I am asking about each one separately.

First, it would be nice if the government would take out the right amount of income taxes the first time so that we wouldn’t have to worry about filling out tax forms or hiring accountants to fill them out to see if we owe, or are owed money. Is there a way to do that or is filling out forms like a 1040 inherent in our tax system?

This effect is a natural result of the fact that taxes are collected through withholding on a pay-as-you-go type system, and the effect would utterly disappear if everyone simply wrote a check to the government with their tax return every April 15. Problem is that much of the tax revenue would go along with it as well.

Note that many people don’t experience this effect because we are self-employed and therefore write quarterly checks to the government (but we have to adjust the amount of the last check to true everything up for the year).

Second, when I had a job I would occasionally hear about coworkers who would work a lot of extra hours to make overtime pay only to make too much money, be bumped up a tax bracket and actually make less. Now I’ve heard that they really don’t lose the money, they’ll just get a bigger tax refund, but the problem is they have to wait until after April of next year to get the money, and they needed the extra money for the current pay period. Is there a way to fix that under our current tax system or again, is it inherent and just something we have to put up with?

It is definitely 100% no-bullshit true that you can never make less money overall by earning more income (EXCEPT for rare cases where deductions or credits are phased out after certain income levels, but generally the phase-out is gradual).

HOWEVER, there’s definitely some voodoo in how withholding works, and I’ve never really fully dug into the meat of how it works to fully understand it. I think (but am not sure) that if one paycheck is for more than you made previously, then the withholding is done from that paycheck as if you make that much on each paycheck. So, when there’s a jump, there’s suddenly a large amount that “should have been” withheld previously, so that hole gets filled (and then gets un-filled when you get it all back as a refund). But I may be wrong here. I noticed this effect back in my employee days when my end-of-year bonus seemed to be withheld from at a much higher rate.

[Snnipe_70E]

@Nobody

As far as I know you can change the number of dependents, or have an additional amount of money withheld, but I’ve never heard of being able to have no taxes withheld.

Nit Pick
you can not claim more dependents than you have. But you can increase the number of exemptions that you have by filling out a new W4 form.

I just looked at my last pay check and 12.2% went to fed taxes. Next pay check will have lots of over time and I am betting that it will be taxed at the 28% bracket. that is only the OT that is the only part that will end up in the higher tax bracket.

I use to adjust my exemptions to have a + or - of about $100 to $200. But with the changes in my investments each year is really different and hard to guess what it will become so I leave them alone.

If you have too little taken out and owe a large amount two years in a row you get fined and mightr have to do 1/4 instalments.

[dracoi]

One of the reasons that people often think a pay increase reduced their take-home pay is that the increase in pay might be paid at a different time than the withholding is taken out.

For example, let’s say that your nice employer buys a $1,000 TV for every employee as a Christmas present. Tax law says that this is income, subject to all the same payroll taxes as your regular payroll check. However, there’s no way to withhold 7.65% of a TV so tax withholding comes out of the next paycheck. If the next check would normally be $2,000 of salary, the taxes for TV (let’s say 7.65% for FICA and 20% for income tax) will reduce your usual take-home pay from $2,000 to $1,747.

Many companies pay cash bonuses or even overtime on a separate check from regular payroll, leading to the same scenario.

It’s easy for someone who doesn’t really understand taxes to get confused by this. But I can’t stress enough that there is no reduction in take-home pay in the above example. It’s not a decrease of $2000 to $1,747; it’s an increase from $2,000 to $2,747.

[GiantRat]

@Quercus

Just to be clear, you’re saying that after the raise, way more estimated tax was withheld than necessary, so she had lower take home (after withholding) but more than got it all back in a refund at the end of the year? That’s possible, but your mother could also have fixed it just by asking for less to be withheld (it’s a form with about three spaces to fill out. Not hard).

If you’re saying that at the end of the year, she had less after-tax income because of the raise, then you’re wrong. Tax rates don’t work that way.

Upon actually doing the calculations (with some made up numbers, since I don’t know the actual numbers involved), it appears you’re correct. She may have been mistaken or exaggerating (probably the former - she’s a nurse, not an accountant).

If she is mistaken, I would suggest that as supporting the perception of our tax code as being a bit complicated (since this is the easy math part of the whole thing).

Thanks for catching that, Quercus.

[GiantRat]

@Exapno_Mapcase

You’ll have to show me the math on this.

Heh - okay, you caught me, too. Reasons I avoided math in college…

:rolleyes:

[R.P.McMurphy]

@Nobody

Where I did I say the word “fair”? That’s a GD topic. I just wanted to know if was possible to have the right amount taken out each time so we wouldn’t have to fill out forms at the end of the year. Apparently the GQ answer is no.

That’s the point of my post. Unless you want to inform and update the IRS and your employers of everything you do throughout the year on a daily basis and are willing to constantly file forms for the IRS then making an accurate deduction from payroll is almost impossible because there are too many outside factors.

• How much you gave to charity.

• Status of dependents?

• All outside income.

• Bought or sold a house?

• Spouse’s income and employment status.

• Investment income. Short or long term?

• Do you qualify for energy conservation credits, etc.?

• and on and on and on.

If you want to update everyone, every day as to what you personal situation is, then have at it. Certainly, if all information was correct and constantly updated then a program could be written to bring your withholding to + or - zero. Good luck! Most of us will do our estimates, wait for our year-end statements and fill out our forms. Then we’ll see where it falls out, make our payment or file for our refund accordingly hoping that none of it raises a red flag with the IRS.

So yea, I guess the answer is “NO”.