tax questions

[Harry Tuttle]

Originally posted by MRT144
and harry, i still arrive at 2677 for the taxes i will pay. (730+(15%*(20280-7300). how do exemptions play into this number.

You are correct in your calcuation. Though, the tax tables are used to estimate taxes. Use the 1040 from 2005, substitute the 2005 standard deduction of $5,000 with $5,150 (2006 std ded) and substitute the 2005 personal exemption of $3,200 with $3,300 (2006 pers exemption).

Once you've done that you should have a pretty good idea of what you will owe. When doing tax planning we use this method rather than those tax tables, mainly because the tax tables were created to keep extra cash in the U.S. Treasury year round.

[Harry Tuttle]

Also, your withholding remains constant based on the total number of exemptions you've chosen on your W-4 and your total planned W-2 income throughout the year. As long as you get paid the same each paycheck the amount taken out will not change.

[KrazyHorse]

Originally posted by MRT144
KH why would it be different? and what does that mean for me?

I don't know why they do things that way, but the 1040 does not give you an exemption for being single and only having one job.

[MRT144]

alright, so i get what happened. I assumed that line B was for anyone in those categories whether they had dependents or not.

so now the only way to rectify this is to change my w4 and set my exemptions to 0.

so i guess the only question that remains is how much money am i going to be without each paycheck now and how small my refund will be next year. only time will tell.

[Harry Tuttle]

Well not so fast. Changing your W4 to zero will cause you to have less money each paycheck.

Your Federal Withholding will decrease the more exemptions you declare. I have a friend who's father declared 10 exemptions on his W4 because of all the credits he receives on his return. This caused him to have a very low withholding. This was ok because he never owed that much when it was time to file.

If you want to have less taken out each paycheck you need to declare some exemptions. Though, and I warn you, do not declare too many.

If you want, I can do some tax planning for you in my spare time. It's not that hard and we can probably maximize your take home pay each paycheck while dwindling down the amount you will owe/get refunded. The goal here is to make sure that when you file next year that you get your ending tax liability down to zero or bring your refund down to zero. This will cause you to have more money in hand and not let it sit in a non-interest accruing account with the IRS.

Here's a quick explanation that says it all:

http://www.taxtrimmers.com/taxfaq/w4.shtml

[Q Classic]

Harry Tuttle = Accountant?

Whoa, we cut across all professions on this webternet site!

(Nifty!)

[Harry Tuttle]

That's why I stick around.

[Harry Tuttle]

The link I posted defines this scenario:

Mr. Nelson takes 5 exemptions on his W4. This causes him to have less withholding taking out over the year then if he declared 3 exemptions. Problem is that come April 15th he has underpaid his tax and has to write a fat check to the US Treasury.

Mr. Nelson would rather not take such a large hit to his funds in April so he would like to have it taken out over the year making his life simpler and smoothing out his bank balance. To smooth things out he is going to have more withholding taken out during the year by declaring fewer exemptions.


Now I take 2 exemptions on my W4. I pay real estate taxes, mortgage interest, and give to charity during the year so itemizing my deductions rather than take the standard deduction is more advantageous for me. In most cases, especially if you don't own a house or have a mortgage, the standard deduction is more advantageous.

Side Note: That CPA who is offering the tax advice should do a bit more than just say yes! He should explain the reasoning!

[MRT144]

Originally posted by Harry Tuttle
Well not so fast. Changing your W4 to zero will cause you to have less money each paycheck.

Your Federal Withholding will decrease the more exemptions you declare. I have a friend who's father declared 10 exemptions on his W4 because of all the credits he receives on his return. This caused him to have a very low withholding. This was ok because he never owed that much when it was time to file.

If you want to have less taken out each paycheck you need to declare some exemptions. Though, and I warn you, do not declare too many.

If you want, I can do some tax planning for you in my spare time. It's not that hard and we can probably maximize your take home pay each paycheck while dwindling down the amount you will owe/get refunded. The goal here is to make sure that when you file next year that you get your ending tax liability down to zero or bring your refund down to zero. This will cause you to have more money in hand and not let it sit in a non-interest accruing account with the IRS.

Here's a quick explanation that says it all:

http://www.taxtrimmers.com/taxfaq/w4.shtml

hey harry, i realize this aspect of this. I know that id be taking home less per paycheck but i can definitely adjust the budget accordingly. And if my income was any indication then it should be apparent i dont have a morgtage etc etc.

the other issue is that even if i had more money in hand it wouldnt really be doing anything for me other than be saved in a crap savings account or spent on things i probably dont need. at a certain income level things like this might matter (where the rate of return on a one year CD or something could offset the taxes not collected by exemptions)

[Harry Tuttle]

Well I'm thinking cashflow. I have a monthly budget that I keep and I make sure my savings don't dip below a certain level. I know the interest made on the money saved would be small, even if the total tax for the year was in the 5 digit range, but the issue is really having the money in your hands and not someone elses.

I would still keep an eye on how much you pay in. An extra hundred or so kept in your hands during the year might mean a lot. I know it does for me. Copays at the doctors office, speeding tickets, going on a date... etc are some worthwhile reasons for having the cash. You never know what might happen during the year that you can't plan on.

[chequita guevara]

It's better to owe them money than the other way around.

[MRT144]

Originally posted by Harry Tuttle
Well I'm thinking cashflow. I have a monthly budget that I keep and I make sure my savings don't dip below a certain level. I know the interest made on the money saved would be small, even if the total tax for the year was in the 5 digit range, but the issue is really having the money in your hands and not someone elses.

I would still keep an eye on how much you pay in. An extra hundred or so kept in your hands during the year might mean a lot. I know it does for me. Copays at the doctors office, speeding tickets, going on a date... etc are some worthwhile reasons for having the cash. You never know what might happen during the year that you can't plan on.

isnt that what the unexpected budget item is for on the monthly budget? and why you add 5-10% on top of all expenses, even inelastic ones like rent

[Harry Tuttle]

I like to use my savings as that threshold. I also balance my bank account using my budget. In fact, at that point, I probably should call it a dynamic cash flow statement. I know how much cash I'm going to receive in the future and how much I have to pay out. It also helps that my everyday expenses are 99% charged to a credit card. That way any unexpected expenses can be put on credit allowing me to stagger my payments more to my liking.

But, as far as actual cash in hand goes, I keep a strict reign on my cash in the bank. Since future tax liabilities can be calculated usually within tens of dollars for a normal taxpayer's return I feel comfortable zeroing in on my tax liability and allowing all the cash I can come to me during the year. Taxes can be safely determined in advance, unlike unexpected expenses.

Besides, by planning your withholding you can take control of one more uncretainty in your life and not have to worry about having the cash in the future.

I dunno, I guess I'm just anal retentive. One thing is for sure though, I know how much cash inflow I can maximize through my paycheck, which for now is my only real source of income. That's probably the most important key to budgeting, identifying how much cash you can have to spend. I like to think of expenses as something I can mitigate, but income, for now, I cannot.

Anyways, do what you want, I'm just offering advice and my experiences. I like to maximize my cash.

Oh, and if you do change your W4, make sure you do at least one exemption, for yourself. You are definately going to have at least one exemption on your tax return. Declaring zero will definately pay in way over your liability.

[MRT144]

im with you harry. Why do you think I was calculating this stuff to begin with?

you do raise a good point about calculating taxes vs unexpected expenses. I think maybe ill adjust my w4 to have 0 exemptions for the next few months and then after that (say october) just take the standard deduction.

p.s. what was the process of becoming a cpa?

[Harry Tuttle]

Originally posted by MRT144

p.s. what was the process of becoming a cpa?

I'm not one yet, but I hope to be in a year or two. Right now I'm at a small firm doing tax and assurance work. A little consulting too, whenever that happens. Don't worry, I've done about 500 tax returns so far and I'm good with my numbers.