Withholding, as you know, is the way for the government to shield you from the hurt of realizing how much money you are actually paying them. They withhold it from your paycheck so that at the end of the year, you don't owe as much or even get a refund. This makes tax time awesome because you get a nice check in the mail. However, you are getting robbed. What if you took all the money that was withheld from your paycheck and dumped it into a CD. You could keep all the interest income and then drop the balance to the government. Instead, the government keeps all that interest money for itself. I've been looking for a way to do this, but the only easy way I can find is to just lie on my W-4 form so that less gets withheld.
However, I have found that this theory will not work. I found out that the actual due date for your taxes is NOT, I repeat NOT April 15th. You MUST pay throughout the year or else you get fined. It is only the PAPERWORK and syncing of the balance that is due on April 15th. So when the government says that your taxes are due on April 15th, they are lying. Your taxes are due much earlier than that. My theory will not work in practice because I found out that there is a fine if you have not allowed sufficient withholding from your salary.
So, the thing to try and do is set up as little withholding as possible (zero if you can figure out how to swing it), then dump the remaining expected balance at 11:59:59 on December 31st of the tax year. There are ways that you can contribute outside of your company's withholding setup, so in order to do this, you'll have to get yourself signed up. That way, you can hold off your taxes until the last possible moment and avoid the fine.
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Underpayment Penalties
You'll have to pay an underpayment penalty for 2009 if you owe more than $1,000 in taxes (after taking withholding into account) and:
* Your taxes withheld don't cover at least 90% of your 2009 tax liability, or
* Your taxes withheld aren't at least 100% of your 2008 tax liability if your AGI is up to $150,000 or 110% if your AGI is more than $150,000. (The amount is $75,000 if you're married filing separately.)
For example:
In 2008 Ellen paid total taxes of $6,000. She thinks her income will be lower in 2009, so she plans to pay $5,000 in estimated tax payments for 2009. When Ellen prepares her 2009 return, she has a total tax of $6,500, $500 more than last year. Since Ellen only paid $5,000 in estimates, she must pay a penalty on the underpaid tax. Ellen would not have had to pay a penalty if she had either:
- Paid $5,850 in estimated payment (90% of 2009 taxes), or
- Paid $6,000 in estimated payments (100% of 2008 taxes)."
2 comments:
Will you please run for office and fix this?
I was discussing this very scam to a colleague, who is about 45 years old, and he actually said, "It's not like 6,000 at the end of the year is that much tax to pay anyway". He didn't even consider withholding as part of his tax burden. I swear I don't know how Americans can survive when they are this dumb.
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