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Thread: Federal Tax Question

  1. #1
    God/dess Gynger's Avatar
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    Default Federal Tax Question

    I always get confused on with holding amounts etc... I usually claim married 2 but I have had a lot of tax with held this year, so I switched it to a 4 and now no tax is being with held, just FICA and the other one, no federal and no state...

    Can anyone shed some light on what is the right amount or percentage? I always end up with a huge refund every year, I'd rather break even and have more money in my pocket than get a huge refund, tax free loan on behalf of me to Unca Sam..

    Thanks.


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  2. #2
    God/dess montythegeek's Avatar
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    Default Re: Federal Tax Question

    Gynger,

    There is no magic percentage, because it depends on both your income and his income. One way to approximate is to do a dry run of your taxes based on last year's return. It does not have to be too fancy and is not hard.
    1 almost every computer comes with MS spreadsheet. they are not hard, they are nothing more than a big at grid. Take last year and put the label of concepts in Column a and the amount for 04 in colum b put a very reasonable estimate for 05 in column c. See if your income or deductions went up. The personal exememption will rise over time so this is a shade of cushion. Now take his last pay stub and your last pay stub and add up how much you have already paid, then add in the last week* remaining weeks of the year Say 13 weeks remaining * what was done last week (month etc). If income went up,look in last year's book to see if as things stand you paid enough. You have a cushion ( a safe harbor) if you have deducted more than you paid in total last year. Paid too much, see if it is more than you are willing to loan Uncle Sam and have them take out less. Paid too little and you need to reduce deductions.

    A deduction claimed is like an extra person in the house, so "A deduction" is personal exemption times 1 or $3100 of taxable income per year2 exemption is like 2 kids or 3100 x 2=$6200. (see why going from 2 to 4 changed things so much?)
    There is no penalty if you 1 paid more than last year or 2 paid all you owe. You can change witholding as often as you want (I do it 3 times a year to spread the pain of making up for a shortfall or get the benefit of any savings before overpayment gets too big Employers can bitch but they have to let you change witholding). The W4 has instructions on how to estimate but is a bit too messy and confusing for married couples. If 2 was too few and 4 too many try to see if 3 works better keeping in mind the safe-harbor provisons on penalties.
    Now is good because you have 1/4 of the year to spread any pain over. If you are a contactor remember Uncle gets Soc Security off the top (after an 401k contributions). If you qualify you can always put money in an IRA if you did not spend it and it reduces your 05 income even though you put it in before you file in 06. You can also do some year-end tinkering like paying a January mortgage bill due 1.1 2 days early.

    Any finance site like yahoo or ms money will have yearend tips running from Dec 1 on.

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