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The W-4 allows for additional federal withholdigns. There are also withholdings for state. These are dollar amounts. If I've calculated my number of withholdings correctly, use pretax dollars for a 401k and health plan, why do I want more money withheld?

Is the withheld money also pretax? Which groups - federal, state, FICA? Does the IRS have a publication specifically discussing what the withholding dollar amount (not number of withholdings) is used for? I've read on the W-4 it is for withholding for taxes but if my figures are correct, is there any other reason to withhold?

Thanks,
Brett
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The W-4 allows for additional federal withholdigns. There are also withholdings for state. These are dollar amounts. If I've calculated my number of withholdings correctly, use pretax dollars for a 401k and health plan, why do I want more money withheld?

You may not...but for example, one of our employees has a rental. There is no withholding from the rent (duh), so they have an additional amount take out of their check each month so they don't end up owing at tax time. They could instead make payment directly to the IRS, but find it easier to have us do it for them.

Or if you have a large amount of interest income that would cause you to have higher tax liability than is covered with just your wages.



Jean
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Ok. Does this go into the "your giving the government a free loan" category? If so, I'd rather pay the bill when annual taxes are due. Why would I do otherwise?

Brett
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Does this go into the "your giving the government a free loan" category? If so, I'd rather pay the bill when annual taxes are due. Why would I do otherwise?

Yes, it's a free loan, but one required by law. Income tax is a "pay as you go" system, either through withholding or estimated tax payments. Failure to pre-pay enough results in a penalty. Details are in IRS Publication 505 and the FAQ.

I have a feeling you haven't properly digested the W-4 instructions since your OP mentioned 401(k) and pre-tax medical deductions. Those have absolutely nothing to do with figuring your withholding allowances. If you're adding allowances for those deductions you'll likely be underwithheld, perhaps significantly.

Phil

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When you say prepay, are you referring to the taxes (Fed, State, FICA, Med) that are withheld automatically from each paycheck?

I don't know any one having money withheld from their paycheck. The only amounts coming out are the ones I mention above. None of them, including myself has ever been penalized for not withholding more.

Since we aren't talking about SE, I suppose only withholdings apply and not estimated tax payments.

Brett
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If so, I'd rather pay the bill when annual taxes are due. Why would I do otherwise?

you want to have the right amount withheld.
if you have too much withheld it's 'giving the government a free loan'.
If you withhold too little, the IRS can penalize you.
see instructions for line 73 in http://www.irs.gov/pub/irs-pdf/i1040gi.pdf

I try to get it so that the amount I've paid in is within $1K of what i owe. I'm not that successful at that always.
But it is easy enough to make sure that 100% (or 110%) of the tax from last year is paid in. And if you have a steady income, that's good enough i think.
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I said: Income tax is a "pay as you go" system, either through withholding or estimated tax payments. Failure to pre-pay enough results in a penalty. Details are in IRS Publication 505 and the FAQ.

You said: When you say prepay, are you referring to the taxes (Fed, State, FICA, Med) that are withheld automatically from each paycheck?


I thought we were talking about withholding based on Form W-4. That's Federal income tax. (Some states base state income tax withholding on the W-4, but we're talking only of Federal.)

I don't know any one having money withheld from their paycheck. The only amounts coming out are the ones I mention above.

I have no idea what we're talking about here. The only thing I can think of is that you don't know anyone who's having additional income tax withheld. That's perfectly reasonable, since it's the unusual situation that requires additional withholding.

I have a feeling you're getting exercised over nothing, but you might want to take a look at IRS Publication 15. It has the employer instructions for withholding.

Phil
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I have a feeling you're getting exercised over nothing

I think we are talking about the same thing. I'm referring to line 6 on the W-4. I was curious as to what the withholding dollar amount meant, as I couldn't determine that from the IRA pubs.

You also mentioned being penalized for not withholding this dollar amount, which is incorrect. As I said, no one I know is having additional dollar amounts being withheld and are not being penalized. You also mention "it's the unusual situation that requires additional withholding.". I agree. The penalty is not broadly applied. Only to specific situations.

Still, I'm unsure what line 6 of the W-4 means if I'm an employee having taxes withheld per my allowances.


Brett
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I'm referring to line 6 on the W-4. I was curious as to what the withholding dollar amount meant, as I couldn't determine that from the IRA pubs.

You put on line 6 the additional amount you want withheld from each paycheck for meeting your fed income tax obligations.

It is your responsibility to have enough withheld to meet your income tax obligations. And if you have significant non-salary income, an easy way to have it withheld is to put an appropriate dollar amount on line 6.

For many people, the worksheet is OK for calculating what to put on the W4.
However it is not perfect, and having the right numbers on the W4 is NOT going to get you excused from paying a penalty on your 1040 if you under-withheld.

I go with calculating what should be on the 1040, and then plugging in the appropriate numbers onto the W4 to get things to come out.
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You also mentioned being penalized for not withholding this dollar amount, which is incorrect.

I must be getting terribly sloppy, because I never meant to say any such thing. I thought I said that the penalty applies if you fail to prepay, through withholding and estimated tax payments, a sufficient amount. I've made numerous references to where one can find detailed explanations of what's sufficient, and no matter how much I'm goaded, I'm not going to repeat what those references say.

As I said, no one I know is having additional dollar amounts being withheld and are not being penalized. You also mention "it's the unusual situation that requires additional withholding.". I agree.

Whew!

The penalty is not broadly applied. Only to specific situations.

Huh? The potential for a penalty is there for every taxpayer, and the penalty is charged to every taxpayer who fails to prepay a sufficient amount.

Still, I'm unsure what line 6 of the W-4 means if I'm an employee having taxes withheld per my allowances.

Have you read Jeanwa's response, which said an employee might have a lot of income from non-withholding sources, such as rental income or interest income and choose to have additional tax withheld instead of making estimated tax payments? You could also look at the two-earner worksheet on the W-4, specifically line 9.

I just recalled a comment I ignored earlier, something to the effect that we weren't talking about self-employment. If you're thinking that estimated taxes apply only to the self-employed, you're wrong. Anyone with sufficient income not subject to withholding must make estimated tax payments.

Phil
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Anyone with sufficient income not subject to withholding must make estimated tax payments.

Phil


and they can make these payments directly or, if they are employed, by using the additional withholding option.

Jean
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My situation might clear things up for you:

My wife and I both completed our W-4s as married with no allowances. My wife even has 10% of her pre-tax income going into her 401(k). Yet, we still end up underwitholding federal taxes because of dividends, interest, and net capital gains. If one owes more than 1000 dollars (if I recall the tax law correctly) there is a penalty. The trick is to withold in a way that keeps us clear of the penalty, but not so much that we get a refund.

marxtacy
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marxtacy: Also, if you withhold as much as last year's tax ( or 110% of last year's tax if you AGI last year was over $150K) there is no penalty for underwithholding. So, pick a number of exemptions on the W-4 so your combined withholding from each paycheck adds up to more than last year's tax and pay the rest next April regardless of your interest, dividends or gains. OR, as poined out by others, just have a certain amount, or extra amount, withheld from each paycheck to meet this "safe harbor".

The point is that if you have a source of withholding, even an IRA distribution, it is couterproductive to pay quarterly estimates. ed
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The trick is to withold in a way that keeps us clear of the penalty, but not so much that we get a refund.

How exactly are you doing that?

BTW, any idea what the penalty percent or dollar amount is?

Thanks,
Brett
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Brett: The penalty is simple interest on any actual underpayment for the time it is underpaid. The interest rate until April 1 was 4%, and from April 1 to July 1 it was 5%, and then back to 4% on July 1.

Was your question how some specific poster was doing something, or how does *anyone* pay enough to avoid a penalty, but not overpay? Read my immediate prior post. Aim your total withholding at the least of last year's tax or within $1,000 or 90% of the current year's tax and make up any shortfall to the least of these "safe harbors" with an additional withholding in December. ed
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How exactly are you doing that?

By witholding an additional X dollars from each paycheck per the W-4. You can figure out the dollar amount using the witholding calculator at the irs website.

http://www.irs.gov/individuals/article/0,,id=96196,00.html


marxtacy
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Do you know if this calculator figures in the standard deduction and personal exemption? I don't think it does, based on my 2003 return.

Brett
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