Exempt! Gasp!!!

[6FeetUnder]

Okay, Here's my situation... It seems like a good idea, but something tells me its not... Enter all of you.

I just claimed exempt on my taxes. I am doing this to pay off my car in an even more accellerated manner. I will be able to pay it off in about 2-3 months, then I will go back to my normal exempions, and save extra money for next year if I need to pay back anything. This should save me interest on my car payment, and possibly earn some interest on a high yield account until next years taxes.

Good idea? Am I going to hell? Jail?

Discuss.

Chris

[m.f.walters]

Re: Exempt! Gasp!!!

I don't think you are going to jail or hell. We own our own business-we usually get a very large tax refund. So I have taxes taken out until about September-if it looks like we're still getting the big refund, I have no taxes taken out of our checks for the rest of the year. I think the only way you can get in trouble is if you don't estimate correctly and end up owing big at the end of the year. Then you may hear from the IRS.

[autoxer]

Re: Exempt! Gasp!!!

I would say bad idea, because of the underpayment penalty:

http://www.irs.gov/publications/p505/ch04.html

and even worse is the false W-4 penalty:

http://www.irs.gov/publications/p505/ch01.html#d0e3513

[MarianneJ]

Re: Exempt! Gasp!!!

Just MHO, but as long as you remember to change your witholding info back to normal in March and will be paying enough in those remaining 9 months to cover 2007 taxes, I think this is a fine idea. I used to change my withholding all the time when I was in charge of payoll. I seriously do not think the IRS cares what you do as long as they get there money in a timely manner (like before it is time to file)! Let us know what you decide and how it turns out.

[vsjhoc]

Re: Exempt! Gasp!!!

I seriously do not think the IRS cares what you do as long as they get there money in a timely manner (like before it is time to file)! Let us know what you decide and how it turns out.

I'm no tax expert, but doesn't the IRS expect you to pay-as-you-go? They don't mind at all if you're due a big refund and you don't claim it until you file your income tax return the following year. But they're not in the business of giving taxpayers an interest-free loan on the tax they owe as it is incurred (as you earn). Isn't this why self-employed people have to pay estimated quarterly tax?

Comments from any of our resident tax experts out there?

[safari]

Re: Exempt! Gasp!!!

I'm no tax expert, but doesn't the IRS expect you to pay-as-you-go? They don't mind at all if you're due a big refund and you don't claim it until you file your income tax return the following year. But they're not in the business of giving taxpayers an interest-free loan on the tax they owe as it is incurred (as you earn). Isn't this why self-employed people have to pay estimated quarterly tax?

Comments from any of our resident tax experts out there?

The only thing IRS cares about is the total amount of taxes you paid during the year. You could have paid more taxes in some months and less in other months, but that doesn't matter. You just need to make sure that you don't owe IRS more than $1,000 when you file your tax return, or they will charge you a penalty.

[vsjhoc]

Re: Exempt! Gasp!!!

The only thing IRS cares about is the total amount of taxes you paid during the year. You could have paid more taxes in some months and less in other months, but that doesn't matter. You just need to make sure that you don't owe IRS more than $1,000 when you file your tax return, or they will charge you a penalty.

Thanks Safari!

[scfr]

Re: Exempt! Gasp!!!

There's no one-size-fits-all answer when it comes to taxes.

I'd say reading the links autoxer posted and seeing what applies to your particular situation would be a pretty good idea.

[The Budget Man]

Re: Exempt! Gasp!!!

Does the IRS in the USA really penalise people who owe more than $1000 on their tax at the end of the financial year?

In most countries the taxation office requires people to submit their tax returns by a set date and then they charge you or issue a refund as needed. There are no penalities provided you complete the paperwork and make any payments within the prescribed time limit.

Enjoy Your Money
The Budget Man

https://www.PersonalityBudgeting.com

Where all good budgets start.

[MonkeyMama]

Re: Exempt! Gasp!!!

Actually -the IRS does not allow you to file exempt at all unless your tax liability was 0 the prior year and will be 0 this year.

I know this too well because I would have liked to claim exempt last year but couldn't because my tax bill was like $500 the year before. Annoying since I took 1/2 year off work and could have used the money the IRS wanted to claim for itself. The best I Could do was claim 20 exemptions or something (Which didn't really help since I Already claimed 15 before, and I didn't want to push it). So I got a $3k refund. Ridiculous, but I follow the law. There are many laws that don't make much sense.

Your employer does not have to report if you do exempt for a while and the IRS may never know, but overall it is against the law and so yes I feel you are playing with fire a bit too much. Though frankly I would be more worried that you would get used to spending more than you really have - the biggest risk.

Yes - if you owe more than 1k you could be penalized. You avoid this penalty though if you pay in the lower of 90% of your current taxes or 110% of last year's taxes. Most of our big clients we have pay in 110% of their prior year bill to avoid the penalties. THen you can owe $50k and no penalty, which some prefer to pay a chunk April 15th. plus just protects us since so many clients fail to tell us all the big things that drastically change their bill (making 90% impossible to accurately estimate). So yeah we cover our butts with that too. The penalties are to keep people from taking advantage and not paying in their tax throughout the year (because why pay it during the year if no penalty???), the safe harbor (90%/110% rule) to cut you a break if you do not have firm #s until year-end, or your income varies widely. (business owners).

The whole exemption thing is driving me batty this year. I had a client who had an employee who heard you can claim exempt (From FICA too mind you - LOL) for 1 month every year???????? Then all the single mothers wanted to file exempt because they started to hear things. I glanced that it would be reasonable in their situation and it was so I said whatever. Though frankly I Wasn't sure they could really all claim exempt. Then finally one day they all woke up and stopped playing with their W-4. Someone scared them, suddenly no more exempt. IT's stuff like that that will drive your company's accountant MAD. LOL. Though it is admittedly amusing the weird tax schemes I hear every so often.