I know of a person who has his state withholding from his payroll check set high purposely to remove $1300 more than is necessary, since he regularly owes about that amount to the Federal government.
I don't feel comfortable challenging his method, nor do I feel he would take kindly to my making some suggestions.
So I blog about it, not understanding why in the world someone would do such a thing.
His income and his wife's is steady. His wife earns a much smaller amount so most of the withholding comes from his paycheck. They do nothing on the side, so they know exactly how much money they will earn, and how much money they will owe to the IRS and to the state of Arizona. He does not do his own taxes, but has an accountant on whom he faithfully relies.
Here are the things I see to be a problem with this method.
I'm not a tax accountant, so I can't be certain that I'm correct on this but from what I understand, the IRS does not look kindly on underpayment of your taxes, and there are only two exceptions which will not cost you an underpayment penalty. First, you must owe less than $1000 and secondly, if you had no tax liability last year.
Me personally, I'd rather avoid paying additional fees if possible. In fact, it makes me nervous to think about making an underpayment of more than $1000.
The irony of this method that he uses, is if he chose to have an additional amount removed from the correct tax on his check, he wouldn't have to worry about underpaying.
Not to mention he's having to wait on the state refund check (must I remind you that Arizona is going broke?) in order to pay his federal taxes.
This means he has to be on the ball and get his taxes done early in the year, and then wait on pins and needles until the state refunds his overpayment, in order to pay the federal government what he owes them.
As Funny About Money commented recently on one of my posts, I would definitely not purposely plan to pay the state of Arizona any more money than I absolutely must.
What if Arizona is so broke next year, this guy doesn't get his refund and has to come up with the money to pay the IRS? What then?
Is this silly or am I just imagining things?
That is very silly, and a waste of time & (most likely) money on his part. I wonder why he doesn’t just have the correct amount withheld for Federal, and reduce his state withholding.
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I wonder if he doesn’t know he can have extra withheld for his federal taxes? Weird that he would withhold the state to pay the federal. Of course, if he’s comfortable enough to tell me he’s doing this odd thing, I’d be comfortable enough to ask what his reasoning is for it.
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We regularly owe to the fed and receive a state income tax refund (they usually net to 0 or a few hundred dollars at most). We had moved, had jobs in two states, bought/sold houses, etc., so I hadn’t done anything about it until this year, when things have evened out. I did add an additional federal withholding to my paycheck, so we should be close to having our withholding be equal to our taxes. However, regarding the question of a penalty due to owing every year, my understanding (and I’ve looked at it, because this is our case) is that as long as your taxes are withheld by your employere and you indicated the correct filing status, dependents, etc., you won’t be hit with a penalty even if you owe each year. I am also not an accountant. 🙂
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This does sound a big odd, I can’t imagine why he wouldn’t just have the correct amount withheld on federal as well, unless there is some special circumstance we don’t know about.
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I think it’s silly too. I don’t like having to pay but I certainly wouldn’t do something like this. 😉
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That sure seems strange. Because the state’s taxes are low compared to the feds’ and because the state of AZ (unlike the IRS) is so incompetent they’re unlikely to notice whether you underpaid, wouldn’t it make more sense to overpay your federal taxes rather than your state taxes? If you’re going to give any government a free loan, give it to the one that’s most likely to send you to Leavenworth if you underpay.
Whoever is preparing this person’s taxes must not have done well on the CPA exam…
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