Tax question (mortgage, credit, first time home buyer)

[DvlsAdvc8]

I have.Maybe someone here can help me out with a little federal income tax question I have at the end of this post.

Here goes: My wife and I are planning to claim the first time homebuyer tax credit on our 09 taxes (i.e. 2010). The credit is $7,500.

As a first time homebuyer, every little bit of downpayment I can come up with is helpful - so I'm thinking to reduce my tax withholding so I keep more of every check (besides the fact that I'm over-withheld right now anyway). So I went and did a bunch of IRS worksheets (pub 919) to figure what my withholding/allowances should be, in order to submit a new W4. Well, the allowances seem way high. In my family there is myself, my wife, and my daughter. I end up with 3 allowances from the W4, and the spreadsheet meant to adjust for the anticipated credit amounts to another 12. This is just with a standard deduction and the first time homebuyer credit.

15 allowances! Anyone ever done this and seen such a high number?

[Charles]

Originally Posted by DvlsAdvc8

I have.Maybe someone here can help me out with a little federal income tax question I have at the end of this post.

Here goes: My wife and I are planning to claim the first time homebuyer tax credit on our 09 taxes (i.e. 2010). The credit is $7,500.

As a first time homebuyer, every little bit of downpayment I can come up with is helpful - so I'm thinking to reduce my tax withholding so I keep more of every check (besides the fact that I'm over-withheld right now anyway). So I went and did a bunch of IRS worksheets (pub 919) to figure what my withholding/allowances should be, in order to submit a new W4. Well, the allowances seem way high. In my family there is myself, my wife, and my daughter. I end up with 3 allowances from the W4, and the spreadsheet meant to adjust for the anticipated credit amounts to another 12. This is just with a standard deduction and the first time homebuyer credit.

15 allowances! Anyone ever done this and seen such a high number?

Yes. I have, and I remember going through the same exercise you are going through. (I have four kids, a maxed out 401(k), one income in the household, and a mortgage so my federal taxes are quite low.) I think I set mine at ten or so even though the calcs say go higher. What I remember reading somewhere (maybe six or seven years ago - things may be different) is that when you set your federal higher than 10 or 11 I forgot, you sort of get recategorized in the eyes of the IRS. I think they will more likely scrutinize your tax form, perhaps increase the odds of an audit. Not sure how true this is but somehow you raise a yellow flag with them. Probably means absolutely nothing especially if your taxes are totally legit.

Ideally you want to fine tune your allowances so high that you owe the most money in April without having to pay a penalty. Getting a refund is not a good thing.

[autobahn]

Mine is M-11. No issues here.

Here is a great W-4 Calculator:
PaycheckCity.com | Form W-4 Assistant

[HB2HSV]

What Charles said. You can claim any # of deduction you want during the year as long as everything is settled (owe tax paid) when you file a tax return.

But I would recommend you consult a tax accountant, generally they have a good idea how high of a deduction you can go without triggering an audit, as well as all the legal deductions you're entitle to. It's a good idea to use a tax accountant anyway, previously I'd slave away 4~5 days doing my taxes and now 1/2 hour with her I am all done!!

[DvlsAdvc8]

Very appreciative of your comments. When I saw that 15 number I started thinking "hmm... now what did I screw up?" ha ha

I typically use turbotax.com for my taxes and its so simple its usually done within 30-45 minutes. My company uses a dataprovider for W2s that Turbotax can link up with and just import so you don't have to type everything in - just look it over. Very nice feature.

Thanks again everyone.

[HB2HSV]

I used to buy the turbotax software for both federal & state versions every year. My experience has been that you can 'tweak' your deductions and the outcomes can be very different. The software is not smart enough to give you tax advice. For the price of software, I can have an experienced tax accountant that provides advice for next year as well as knowing all the pitfalls in triggering audits.

[mm42]

Originally Posted by HB2HSV

You can claim any # of deduction you want during the year as long as everything is settled (owe tax paid) when you file a tax return.

Not quite - if you underwithold too much you can be charged interest and penalties:

Tax Basics, Ch. 1: Understanding and avoiding underwithholding

[HB2HSV]

Originally Posted by mm42

Not quite - if you underwithold too much you can be charged interest and penalties:

Tax Basics, Ch. 1: Understanding and avoiding underwithholding

You're correct!!! I should've qualify my statement to "... as long as you don't owe more than $1,000 in taxes when filing..."

See IRS guideline on underpayment
Tax Topics - Topic 306 Penalty for Underpayment of Estimated Tax

But back to the OP's question at hand - can he increase his withholdings in anticipating this tax 'credit' so to increase his monthly cash flow? The answer is "yes".

According to this document by the National Association of Realtors on First Time Home Buyer Tax Credit, you can readjust your W-4 withholdings to increase your monthly cash flow (Q&A #13).

[DvlsAdvc8]

Originally Posted by HB2HSV

I used to buy the turbotax software for both federal & state versions every year. My experience has been that you can 'tweak' your deductions and the outcomes can be very different. The software is not smart enough to give you tax advice. For the price of software, I can have an experienced tax accountant that provides advice for next year as well as knowing all the pitfalls in triggering audits.

I don't buy the software, I use the website, and no way I'm paying someone to do my taxes - they're not that difficult. Especially on turbotax. Federal is free and state is like $30. There is a ton of help and support on the site as well - it just takes maybe a day to get an answer... whereas people are always around here.

[DvlsAdvc8]

Originally Posted by mm42

Not quite - if you underwithold too much you can be charged interest and penalties:

Tax Basics, Ch. 1: Understanding and avoiding underwithholding

Yep, I know how it works. My question was just whether the number of allowances that all the IRS worksheets came up with for me was outlandish. Its okay though because I realized why my numbers were fuzzy. I was having additional withheld last year due to a jump in income. With the credit taken into account, I don't need to have additional withheld, and can claim a few allowances.