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Old 01-24-2013, 12:19 PM   #16
sam_gordon
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Quote:
Originally Posted by NeutralNovice View Post
@daughtersrus
I am able to claim exempt from Fed Income Taxes; however, I would still have to pay other withholding like SDI, SSI, etc.


Basically, what I am trying to do is this--hypothetically:

For this scenario, imagine that the only tax that exists is the Federal Income Tax.

Hypothetical #1
Claim: No Exemptions
Gross Income: $100,000
Withholding Rate: 25% ($25,000)
Calculated Tax Liability Rate: 15% ($15,000)
Expected Refund: $10,000
Overall Earnings After Tax: $85,000

Hypothetical #2
Claim: Exempt
Gross Income: $100,000
Withholding Rate: 0%
Calculated Tax Liability Rate: 15% ($15,000)
Expected to Owe: $15,000
Overall Earnings After Tax: $85,000
>>>Instead of the government holding my money and not paying interest, I am getting all the money and will put 15% of each check into a Savings Account that I won't touch.

So using a "Regular Deposit Savings Interest Calculator," I would deposit about $960 into account for each check or $1920/month, without touching it. Current APY is 1.00%. So at the end of the year, the interest accrued would be about $242.

Wow, so after all that, I would only make $242--and that's assuming I make $100k, which I don't LOL. Either way though, every penny counts--I guess I am just worried about the consequences if I claim exempt then just pay my actual tax liability in one lump sum.
What it sounds like you need to do is to change your withholding so that you get back $833 ($10K/12 months) more each month. So instead of claiming 0 dependents, throw some dependents in there. Your HR person can help you figure out how much will get you close to the $0 mark come April. And if you look at the W-4 form, you're claiming "allowances", NOT "exemptions".
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Old 01-24-2013, 12:21 PM   #17
clutter
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Quote:
Originally Posted by NeutralNovice View Post
For all of my working life so far, I have always claimed Single-0-0, thus, I have no exemptions whenever I receive my paycheck. I always get a refund after I file so basically, the government is the one holding my money, to which I earn no interest.

Can someone explain to me if this scenario makes sense and if it would end up working out more over the long run?

Scenario:

If I claim exempt on my checks all year and pay no Federal Income Tax and then simply put what I would have been taxed into a high yield savings account without touching the money for a whole year, would I end up getting more money overall since all I would be paying is my exact tax liability with the leftovers being all mine?

I mean, I would assume so, since the interest would be the increased difference; however, are there any caveats to claiming exempt? For example, at the end of the year, will I be somehow liable for more taxes than if I claimed 0?

A risk that I know of already, at least, would be the fact that since the money is already mine, that I might get tempted to dip into that "tax fund" and, thus, cause me issues at the end of the year.

Ugh, I wish I could me more concise and articulate on this matter--I hope my explanation of the scenario isn't confusing/badly worded.
You will owe interest and penalties for not paying enough during each calendar quarter.

From a practical standpoint, the IRS requires additional filings from employers to verify exempt status, as well as any claims over a certain number of exemptions.

Then there is the risk of spending the funds that you are setting aside for taxes. You do not want the IRS to be a creditor. That's setting you up for failure.

FWIW, an old roommate had done this back when there were less obstacles to doing so. It took her YEARS to get out of debt with the IRS. Plus, she did end up adjusting to the tax-less lifestyle. It was really hard to adjust her life back to not just withholding, but the additional debt.
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Old 01-24-2013, 12:33 PM   #18
NeutralNovice
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Quote:
Originally Posted by clutter View Post
You will owe interest and penalties for not paying enough during each calendar quarter.

From a practical standpoint, the IRS requires additional filings from employers to verify exempt status, as well as any claims over a certain number of exemptions.

Then there is the risk of spending the funds that you are setting aside for taxes. You do not want the IRS to be a creditor. That's setting you up for failure.

FWIW, an old roommate had done this back when there were less obstacles to doing so. It took her YEARS to get out of debt with the IRS. Plus, she did end up adjusting to the tax-less lifestyle. It was really hard to adjust her life back to not just withholding, but the additional debt.

Wow, you all are so helpful--replies are so quick that by the time I'm about to ask another question, you guys have already answered it. Thank you so much!

The reason why I thought of this scenario was because there was someone else at my job who accidentally forgot to reset her claim status from Exempt to 0. I told her she's pretty much screwed because she didn't pay ANY FIC last year AND she spent all or most of her earnings. I only thought she would simply pay whatever her tax liability is when she calculates it--which is why I thought of the whole "getting interest" thing. Now that I know there are penalties, I feel really bad for her because I don't think she knows that there will be any penalties. Eek.

If anyone knows, just how steep are these penalties?
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Old 01-24-2013, 12:48 PM   #19
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It all depends on the liability and the timing of any payments. However, I wouldn't worry about it if I was you, as it is her problem, not yours. She should however, file her taxes asap and pay something. The IRS will set up a payment plan if need be. However, she is in for a shock as she will be living life post-deductions and with additional debt. She will have a big lifestyle change.

I'm assuming she will be filing a 1040EZ since she sounds young enough to not have a complicated return. I think that if she trys a program like Turbotax (which you can usually find for free with a 1040EZ), they can estimate interest and penalties for her, but generally the IRS will bill you for them after you file.

You're in CA, so there will be state withholding issues as well, I assume.
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Old 01-24-2013, 08:46 PM   #20
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Quote:
Originally Posted by clutter View Post
It all depends on the liability and the timing of any payments. However, I wouldn't worry about it if I was you, as it is her problem, not yours. She should however, file her taxes asap and pay something. The IRS will set up a payment plan if need be. However, she is in for a shock as she will be living life post-deductions and with additional debt. She will have a big lifestyle change.

I'm assuming she will be filing a 1040EZ since she sounds young enough to not have a complicated return. I think that if she trys a program like Turbotax (which you can usually find for free with a 1040EZ), they can estimate interest and penalties for her, but generally the IRS will bill you for them after you file.

You're in CA, so there will be state withholding issues as well, I assume.
Thanks! I'm a bit worried for her because she's a friend but at the same time, she's also an example why I don't mess with exemptions in the first place. Heck, I'm the only one in the company that contributes to a Roth 401k rather than regular--I'd prefer to reduce my tax burden when I retire.

When I see her this week, I'll let her know of the info I found from you guys--she wont like it, but it's the truth.

Luckily, her exempt option did not include state withholding so she shouldn't be receiving penalties from them as well.
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Old 01-25-2013, 01:41 PM   #21
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Quote:
Originally Posted by NeutralNovice View Post
Anyone able to verify a requirement to pay taxes on a quarterly basis?



Thank you everyone for your replies and help!
You must pay at least 90% of the current year tax or 100% of the prior year tax. You must pay it evenly throughout the year in quarterly estimated payments or you must pay it in federal withholding. Failure to do so results in an estimated tax penalty.
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Old 01-26-2013, 12:24 AM   #22
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The oversimplistic....but reality of it is, the government wants the tax money as soon as they can get it. So like everyone said, the ideal situation is to pay as you go and owe nothing, and get nothing back at the end of the year.

I used to be able to do that, by claming zero exemptions, and having a specific percentage of my pay withheld.
But they change the law and you can no longer have a percentage withheld, you have to use the withholding tables.

If I take 4 exemptions, I end up owing the feds about $1,000 and the state about $200.

If I take 3 exemptions, I get $1,000 back, and owe the state about $100. Why the federal and state witholding tables are so out of wack, i don't know.
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Old 01-26-2013, 11:58 AM   #23
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Just one other tidbit of info just to clarify...if you make $100,000 a year or more you will be paying a 25% federal income tax, not 15%. That is the 2012 tax rate. You would pay close to $10,000 right off the bat and then you pay 25% tax on any income over $70,000. And that is for married filing jointly which is the lesser of the tax burdens.

If you are single your taxes jump to around $17,000 then 28% for anything over $87,000.
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