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the concept that what their company witholds is not related to just what their taxes are at the end of a year is very foreign to most people.
they think if they fill out that w4 and put the number of dependents correctly then it should equal their tax situation.
it does not and what you put on that form is only between you and the company.
if you want more taken out each week have them reduce your dependents or if you get to much back have them increase them.
you won't go to jail if the numbers on your w4 don't match the dependents in your family..
it is not always bad to overpay . for some it is the only forced saving they will have.
you can not watch judge judy without someone supposed to pay a loan when they got the infamous income tax check back.
in my case we have alot of investment income every year so it is hard to guess each year just what we will owe.
we send in an estimated amount but if we are over i just tell them keep it for next year.
the fraction of a percent you can get short term on the money is not worth passing it back and forth.
it always feels so much better when i do the following years taxes and i have 4 or 5k in the tax bank already being held . since i never had it in my account i don't feel the pain of it going back out and that is worth something in my book.
9 out of 10 times i owe them anyway , i think last year was one of the few times we were owed money back. it caught me by such surprise i told them keep it towards next year. ha ha ha.
OP, I have found along the way that for my current income & deductions, my W4 withholdings need to be "4" to get close to breakeven (still usually get between $500-1,000 back). It's not lying or dishonest; it's just a means to get your company to take out a more accurate tax amount for your income & deductions throughout the year.
Now, when I go fill out my tax return, I only claim myself, but the W4 withholdings make the difference between "taxes paid" and "taxes owed" lines match pretty closely vs being $5,000 apart like yours are.
As for itemized deductions affecting your taxes owed, they lower your tax bill by "tax rate x deducted amount". For example, if you pay $4,000 in property taxes each year and are in the 25% rate, it lowers your tax bill by $4,000 x .25 = $1,000. A $1,000 check to charity at the same tax rate lowers your tax bill by $250. Whatever your biggest itemized deductions are- those are the ones lowering your tax bill the most (as long as your itemized deductions excess the standard personal/household exemption).
I've heard many financial people say that it's better to pay less in taxes all year (and use that money in the way you decide) than to pay higher income taxes all year and then get a "windfall" every year in a tax return. I just heard Dave Ramsey mention this idea again a few minutes ago on the radio. He told the caller "If you're getting $6,000 back in a tax return, you need to adjust your withholding."
But I routinely get between $5000-$6000 back each year (mostly from federal, and a little from the state), and I believe my withholding is "adjusted" as low as it can go (single with zero exemptions).
I don't mind getting this little windfall every February, but I see it would be better if I could just pay less all year and maybe invest that money or at least get a little interest on it. But the way I see it, there's no way I can do that. Am I missing something? I do have a CPA do my tax returns every year, and I'll certainly ask him. But I'm kind of certain he would have advised me on this already if there was something that should change.
I'm sure my payroll dept isn't just going to agree to withhold less from each of my checks because I tell them how much I give to charities, or how much interest I pay on my mortgage! I know some people might claim X number of dependents all year, and then get money back at the end of the year because they don't have that many dependents. But I can't see the logic in that, unless I considered myself untrustworthy with my own money and need the government to hold it for me. So those people, I agree, should adjust their withholding downward. But me?
So is Dave wrong on this? Are all those other people who say this wrong too?
Dave is right, to a point.
First off, you can control your withholdings. If you just increase your number of exemptions, your withholding will go down.
But I think in certain cases Dave is wrong. Some people have no financial discipline, and need the forced savings that an extra withholding amount brings. Then they can possibly invest the money they get in a lump sum from the refund. If they got the money in each paycheck, they'd spend it and have nothing.
So if you're that type of person, continue with the overwithholding, even though it amounts to giving the government an interest free loan. It is a poor man's savings plan, and for some people of lower financial status and less financial sophistocation, that tax refund is the only time that real money ever passes through their hands.
No, like I said earlier, I'm quite frugal and try to prioritize saving. I'm not likely to squander the extra little bit of money I'll get all year, just like I don't squander it when I get it in the form of a tax refund. Even if I only get a small amount of interest, I'd rather give that to charity than have the government hold the money interest free.
I need to find out exactly how much I will take home if I claim 1 dependent. The online calculators don't seem to be giving me good numbers.
2) Go to a page like 1040 Tax Calculator - Dinkytown.net Financial Calculators and put in your income and all applicable info (kids, 401k, charitable donations, etc.). It will tell you what your federal tax due will be and I've found it to be relatively accurate. Obviously this won't work if you don't have an idea of how much you make each year.
Of course I know what I earn each year. But here on my w-2, there are several different numbers for wages, tips, and other comp, then Gross Pay, then SS wages, and state wages. I just entered the highest one, the one that says Gross Pay. Then when it asks for Federal taxes withheld, I just entered that number from my W-2, but what about all the other taxes I've paid (SS, Medicare, state, SUI/SDI)? those things all make my income go down too.
But this calculator says I should end up OWING another $400+ and not getting any refund. It doesn't ask anything about charitable contributions, property taxes paid, or mortgage interest. I'm sure that's the reason. Also they ask nothing about the money I put into my 401k.
This is why I hate online calculators, but thanks for the info. The other calculator someone posted had me getting a refund of over 8,000. I guess I'll just wait until I see my accountant.
That 1040 calculator is pretty accurate - in fact it looks just like the 1040 form.
I think if you got to know your W2's and how the 1040 form works a bit better (e.g. all the adjustments, credits, deductions, exemptions, etc.) it would make more sense.
For the most part, the "wages, tips and other compensation" box is your income AFTER you exclude your 401k contributions. Your "medicare wages" includes that 401k amount. The SS wages is the same as the Medicare box, unless you make over the cap, in which case it will just show the capped amount - $110,100.
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