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Author: ImpoverishedFool One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121351  
Subject: W-4 strategy Date: 3/8/1999 12:16 PM
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Hello Fools. After learning that my girl and I will be getting a combined return of over $2000 this year, we decided to try to reduce the deductions from our paychecks and save the tax money ourselves. That's too much interest to give away to Uncle Scam. The ultimate plan would be to have no income tax deducted at all and automatically divert 25-30% of out income into a decent interest, no risk savings account. We will owe every year, but hey, there could be significant interest income there. The question: How do we get our employers to stop deducting?

Thanks in advance!!

Jason
the
ImpoverishedFool
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Author: RheS Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11620 of 121351
Subject: Re: W-4 strategy Date: 3/8/1999 2:15 PM
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ImpoverishedFool has a tax savings idea: "After learning that my girl and I will be getting a combined return of over $2000 this year, we decided to try to reduce the deductions from our paychecks and save the tax money ourselves. That's too much interest to give away to Uncle Scam. The ultimate plan would be to have no income tax deducted at all and automatically divert 25-30% of out income into a decent interest, no risk savings account. We will owe every year, but hey, there could be significant interest income there. The question: How do we get our employers to stop deducting?"

While the IRS doesn't mind you loaning them money until you file your taxes, they don't care to loan money to you. There are penalties for not making enough tax payments during the year... either by payroll withholding or estimated taxes, which are usually paid each quarter. You don't have to overpay, but you must get close. Check out the Tax FAQ on estimated taxes:

http://www.fool.com/school/taxes/Taxes35.htm

to get an idea of the rules; Roy has a pretty fair summary, although he's mostly writing to people who have sudden income (like investment gains!) instead of people who don't pay enough, but it's the same rules. Obviously, you can put anything you want on your Form W-4, but if you underwithhold, you are going to pay more later.

Further, the IRS has already seen various variations on this scheme, and they've added a rule that your employer has to report if you put a large number of exemptions on your W-4 form (I think it's ten, but I can't remember). Sure, some people have ten dependents, but not very many, and it gives the IRS a chance to check out people who are likely to be trying to underwithhold. It might even be considered tax fraud, which is no fun at all to get caught at.

So what you really want to do is adjust your withholding so that you pay almost enough. That's the Foolish way.

Sorry about that....

Dick Smith

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Author: MBMoran Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11630 of 121351
Subject: Re: W-4 strategy Date: 3/8/1999 3:35 PM
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You can ask your employers not to deduct, but you will then be hit by an underpayment penalty from the IRS. You are required to pay at least 100% of your prior year liability prior to filing your return. You would be better off estimating your income and increasing your exemptions on your W-4 to break even. Run a quick tax return quarterly to check up or have your accountant do it for you.

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Author: ImpoverishedFool One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11634 of 121351
Subject: Re: W-4 strategy Date: 3/8/1999 4:46 PM
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"While the IRS doesn't mind you loaning them money until you file your taxes, they don't care to loan money to you."

[WARNING: Venting ahead]

LOAN MONEY TO ME?!? IT'S MINE IN THE FIRST PLACE!!! AAAUUUGGHH. I am a kickin' and screamin' taxpayer, I tell ya. These kinds of tax laws were the main reason for the American Revolution a mere 220-odd years ago. How quickly we forget.


Jason
the
Impoverished Fool

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Author: FLboater One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11635 of 121351
Subject: Re: W-4 strategy Date: 3/8/1999 4:54 PM
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Dick Smith said: [[Further, the IRS has already seen various variations on this scheme, and they've added a rule that
your employer has to report if you put a large number of exemptions on your W-4 form (I think it's
ten, but I can't remember). Sure, some people have ten dependents, but not very many, and it gives
the IRS a chance to check out people who are likely to be trying to underwithhold. It might even be
considered tax fraud, which is no fun at all to get caught at.]]


The IRS requirement on employers is to report to the Infernal Service all W4's with over 10 EXEMPTIONS claimed. That's a lot different than dependents. Exemptions may be as many as you are entitled to. I had 12 for a couple of years with only 2 children, but had a high up-front depreciation loss on rental property that shoved my tax bill way down. If you claim 10 or more exeptions, the IRS will send you directly a questionaire to fill out and return, basically recalculating the expected taxes from additional data (like my rental property, real dependents, and other income, gains, and losses.) If your claim for even 20 exeptions is real, all you have to do is prove it when you claim it for withholding, instead of later when you file your 1040 tax return. No big deal other than having the IRS in your drawers.

R

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Author: RheS Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11637 of 121351
Subject: Re: W-4 strategy Date: 3/8/1999 5:34 PM
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I said " IRS has already seen various variations on this scheme, and they've added a rule that your employer has to report if you put a large number of exemptions on your W-4 form (I think it's ten, but I can't remember). Sure, some people have ten dependents, but not very many, and it gives the IRS a chance to check out people who are likely to be trying to underwithhold. It might even be considered tax fraud, which is no fun at all to get caught at."

FLboater replied "The IRS requirement on employers is to report to the Infernal Service all W4's with over 10 EXEMPTIONS claimed. That's a lot different than dependents. Exemptions may be as many as you are entitled to. I had 12 for a couple of years with only 2 children, but had a high up-front depreciation loss on rental property that shoved my tax bill way down. If you claim 10 or more exeptions, the IRS will send you directly a questionaire to fill out and return, basically recalculating the expected taxes from additional data (like my rental property, real dependents, and other income, gains, and losses.) If your claim for even 20 exeptions is real, all you have to do is prove it when you claim it for withholding, instead of later when you file your 1040 tax return. No big deal other than having the IRS in your drawers."

Agreed. Note that I used exemptions in the first sentence of my answer, and dependent in the second, which seemed like the easiest (but not only, as you point out) way to correctly have that many exemptions.

My point is, this change in the rules came about because the potential for fraud in not withholding enough became obvious to a lot of people... and, shortly thereafter, to the IRS. The IRS may well be an evil organization which occasionally uses inappropriate tactics against the innocent... but there are people who think that it's too hard to study the rules, and obey the law by paying as little as possible (as we all hope to do, I assume), and instead just want to cheat.

And, as one who does attempt to file correctly, I'd rather they chased those tax avoiders than hassle me over whether I got my Schedule D exactly right. And I suspect that if I do do it wrong, and the IRS manages to notice, they'll be nicer to me than to someone who gives the impression of trying to cheat.


Whether this system of taxation, or any, is morally right, or even whether it is a good thing, is not the IRS's problem... it's Congress's problem. And Roy might well argue that we're not talking about that here, but instead about getting along with the current rules, no matter how stupid they may seem.

In the meantime, it's probably better to know that what seems at first like a fine idea, holding on to the money until April, isn't permitted by the current rules, but sets off a bunch of expensive penalties. That's not a surprise anyone wants.

Dick

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Author: jkrou Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11807 of 121351
Subject: Re: W-4 strategy Date: 3/9/1999 8:58 PM
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Further, the IRS has already seen various variations on this scheme, and they've added a rule that
your employer has to report if you put a large number of exemptions on your W-4 form (I think it's
ten, but I can't remember).


You are correct. The employer is required to forward all W-4 Forms to the IRS that have over 10 allowances. One way to know exactly how much of your wages will be withheld (so you are staying within the rules) is to mark your form as FLAT $200 (or whatever dollar amount.) In this manner, you are playing by the rules and have control over how much Uncle Sammy gets of your paycheck.

Jenn

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Author: UUinMN Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11828 of 121351
Subject: Re: W-4 strategy Date: 3/10/1999 10:03 AM
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Jason ranted:

<< These kinds of tax laws were the main reason for the American Revolution a mere 220-odd years ago. How quickly we forget. >>

No, Jason, the American Revolution was fought to allow Americans to be taxed by Americans--not to put an end to taxes.

Are you sure you aren't thinking of the Whiskey Rebellion?

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Author: ImpoverishedFool One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11850 of 121351
Subject: Re: W-4 strategy Date: 3/10/1999 1:53 PM
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<<No, Jason, the American Revolution was fought to allow Americans to be taxed by Americans--not to put an end to taxes.>>

I agree. However, the types of taxation under which we live would've been (and still are for many) considered outrageous. You may recall that the income tax was unconstitutional for the first 100 or so years of the union.
This board is named "Tax Strategies" which implies "keep all you can". Why do we feel that we need to play keep away from Uncle scam? Because he takes too much and uses it in ways that the average joe cannot justify, that's why. I will continue to be a reluctant taxpayer until I'm satified that the money is being spent responsibly. Of course, I'm sure I'll be dead long before that.

Jason

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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11930 of 121351
Subject: Re: W-4 strategy Date: 3/11/1999 12:49 AM
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[[After learning that my girl and I will be getting a combined return of
over $2000 this year, we decided to try to reduce the deductions from our
paychecks and save the tax money ourselves.]]

Good idea. Very Foolish of you!!!

[[ That's too much interest to give
away to Uncle Scam. The ultimate plan would be to have no income tax
deducted at all and automatically divert 25-30% of out income into a decent
interest, no risk savings account. We will owe every year, but hey, there could
be significant interest income there.]]

Bad idea. You'll be subject to the underpayment penalty. The tax system is a "pay as you go" system. You can read more about the estimated tax issues in the Taxes FAQ area. And you really should, in order to get a handle on what you MUST pay in to avoid the penalty (and the penalty will be MUCH greater that the interest that you can earn on the funds in a bank).

But also remember that you can owe Uncle Sammy up to $1,000 without getting hit by the penalty. So you can certainly adjust your W-4 withholding in order to get to a balance due around (but not greater) than $1k.

[[ The question: How do we get our employers
to stop deducting?]]

You would have to complete a new W-4 form. But again, I don't think that you really want to do that. If you sign the W-4 form (which you do under penalty of perjury) and stop your withholding completely, you would actually be lying to Uncle Sammy (check the small print on the Form W-4 form), and could be subject to a $500 civil penalty.

Go to the IRS web site and download/read Form W-4 and the associated instructions.

TMF Taxes
Roy

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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11935 of 121351
Subject: Re: W-4 strategy Date: 3/11/1999 1:29 AM
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[[You are required to pay at least 100% of
your prior year liability prior to filing your return.]]

Not quite correct. You are REQUIRED to pay in 90% of your current year tax liability. But even if you don't hit the 90% level, you will STILL not get hit with the underpayment penalty if your balance due is $1,000 or less.

TMF Taxes
Roy

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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11940 of 121351
Subject: Re: W-4 strategy Date: 3/11/1999 1:49 AM
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[[Whether this system of taxation, or any, is morally right, or even whether it is a
good thing, is not the IRS's problem... it's Congress's problem. And Roy might
well argue that we're not talking about that here, but instead about getting along
with the current rules, no matter how stupid they may seem.]]

That's the key, Dick...abiding by the rules...no matter how stupid they might seem. When the general public has had enough, they will let the Congress know and things may change. But until then, it seems that the "general public" is too busy watching the Barbara Walters special.

I personally think that we get the government that we deserve. If we don't like it, we can change it. But it's easier to find out what's on TV than to write your Congressperson or go to meetings to make productive change in the system.

All I, or Dick, or Dow Danny, or JABoa, or anybody else can do here is to provide the best information that we have to allow you to follow the rules. If you chose NOT to follow the rules, you can do so with your eyes wide open. And, I would expect if you get nabbed, you'll accept your punishment like a man, and not try to become a "victim".

Just my $.02
TMF Taxes
Roy

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Author: ImpoverishedFool One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11970 of 121351
Subject: Re: W-4 strategy Date: 3/11/1999 9:38 AM
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<<I personally think that we get the government that we deserve. If we don't like it, we can change it. But it's easier to find out what's on TV than to write your Congressperson or go to meetings to make productive change in the system.>>

In theory, yes. In practice, it is very tough for regular citizens with no fortune to influence gov't at the fed level. Believe me. I work for a non-profit whose mission is to increase voter turnout. We've been trying for years to get support for ideas that 95% of citizens agree with. We've had limited success with local and state gov'ts, but none on the fed level.

I agree that we're here on this board to make the best of what we have. This is a place for pragmatism, but a little idealism never hurts! :-) Also, I want everyone to know that I appreciate the Fool boards very much. I just need to bitch occasionally.

Jason
the
Impoverished Fool

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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12165 of 121351
Subject: Re: W-4 strategy Date: 3/14/1999 10:51 PM
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[[In theory, yes. In practice, it is very tough for regular citizens with no fortune to
influence gov't at the fed level.]]

I would respectfully disagree. You would be surprised how just a simple telephone call or letter will impact your Congressperson. It's just that most people don't want to take the time.

[[ I agree that we're here on this board to make the best of what we have. This is a
place for pragmatism, but a little idealism never hurts! :-)]]

Agreed...

[[ Also, I want everyone
to know that I appreciate the Fool boards very much. I just need to bitch
occasionally.]]

Me too. Which is why I responded to your question in the way I did. My bitch is that most people are basically lazy, and won't take the time to influence their elected representatives. I guess we'll just have to agree to disagree on this point.

TMF Taxes
Roy

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