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I am new to taxes. I used to have my mom do it for me, and now that I am an adult (I guess) I want to take over the responsibility. At work, a buddy instead of having the taxes come out every pay check, he opts to have the bill sent to him at the end of the year. Instead, he figures out the % that taxes are taken out and takes that money and puts it into high interest earning accounts. He always puts a little more just to be safe. Then when it comes time to pay the bill, he gets to keep the interest that he made off the money in the account. He says it's not much, but it's something. Is this a smart idea? Bad idea?
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Re: Tax Question
Unless you're making peanuts, this is illegal. You're required to pay income tax throughout the year. Either that's through payroll deduction or by making estimated tax payments.
The IRS likes to get interest-free loans but it doesn't give them. -
Re: Tax Question
I agree with Sweepsplayer. If your friend is deliberately filing a fraudulent W-4, say listing 99 dependents, so that no taxes are taken out, there is a penalty and possible prosecution. I don't know how hard the IRS cracks down on this, but why take a chance. Somevery low income people who qualify for Earned Income Credit can have no taxes taken out, because they have no tax liability, but they won't owe at the end of the year like your friend.Comment
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Re: Tax Question
You can reduce the amount that is withheld, but not eliminate it all together. I set my witholding to closely match what I will owe, so I don't owe a lot at the end of the year and I don't get a big refund either.
I would say it is not smart to reduce your taxes all the way & pay at the end of the year, because there is an Underpayment penalty if you don't pay enough throughout the year.
Try the IRS witholding calculator to see where you stand: http://www.irs.gov/individuals/artic...=96196,00.htmlComment
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Re: Tax Question
If you underpay by too much, you may get hit with a penalty when you file your taxes.
The best strategy is to just go ahead and have as close to what you actually owe withheld over the course of the year. As your life circumstances change (through marriage, having children, etc), you will have to make adjustments to your W-4.Comment
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Re: Tax Question
Good answer.Originally posted by Sweepsplayer
Even self-employed persons, who file and pay estimated taxes quarterly, will be charged penalty and interest if they do not do so properly.
There is no legitimate way to avoid paying income taxes during the course of the year.
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Re: Tax Question
I make is so that I have to pay them, but not so much that I incure the pentalty. Something like a few hundred bucks. I'm not sure what your friend is doing. You might ask him for details. There's nothing wrong with having to pay at tax time, it's a question of how much.Comment
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Re: Tax Question
Unless you have no tax liability (meaning your income tax bill is 0) for the year prior, AND you expect it to be 0 this year, you have to have taxes withheld from your check.
I know this because I Was kind of peeved in a situation when I took maternity leave and had a year of no taxes, I still had to pay them. I claimed 99 exemptions instead which was legal - okay more like 20 - but they still took somehting out which peeved me - had to wait for the full refund at the end of the year. That's the law.
But funny you ask because one of my clients has been going around and around on this with her employees. One employee said twice a year you can claim exempt from all taxes (even disability and social security). LOL. She told everyone else and then everyone wanted to start claiming exempt. Kind of funny but a nuisance. Then all the employees talk and everyone wants to file exempt. Bad IDea - the IRS will get you... Plus there is no exemption from Social security - outside government anwyay. But bad advice travels fast...
Your buddy is playing with fire. You can check out the withholding calculator so you don't withhold too much. Your best (legal) bet.Comment
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