Free Ebook.


Enter your email address:

Delivered by FeedBurner

« Star Money Articles for the Week of March 26 | Main | Four Ways to Ruin Your Retirement »

March 30, 2007

Comments

Feed You can follow this conversation by subscribing to the comment feed for this post.

I know that I am not responsible enough to do that. For many people it seems like a great idea that if done properly will have no effect on their finances. I know I am paying a penalty for a refund, but in my mind I need the mentally forced savings or I will find other things to spend all or part of the money I would save during the year.

If you end up owing more than $1000 at the end of the year, the IRS will hit you with a penalty--I think the minimum is $25, so if you owe $1001 at the end of the year, you'd pay $1026. I'm not sure what the effective interest rate of the penalty is, but it's much higher than what I get paid on my savings account.

Guesstimating your taxes is very difficult to do if you're self-employed, or if you make changes to your taxable investments during the tax year, triggering a lot of capital gains tax.

I make sure my withholding from any W-2 jobs plus estimated tax payments equal at least 100% of last year's tax to get into the safe harbor that allows you to avoid a penalty for underpayment of estimated taxes.

I personally have used the calculator at http://www.irs.gov/individuals/page/0,,id=14806,00.html and it seemed to do well for me.

I had no idea how my taxes would fare this year after buying a house, getting married, having self-employment income, and my wife quitting her job and going back to school. We wound up with a few thousand back federal, but owed $600+ state. This year is going to be just as wildly different from last year as the last year was to the year before.

I've used this one: http://www.kiplinger.com/tools/withholding/ It's not as involved as the one BB posted, which means it's probably not as accurate. Our taxes were bittersweet this year. We expected a return, but got back less than $100 (net from the states and federal...owed the feds). But we jumped a tax bracket, lived in two states, each worked two jobs (for a total of 5 W2's). So the bad part was that we expected a return. The good part was that we didn't get a big one meaning that we received all of our money.

Hey Blaine, I know you from another board. ;)

BB beat me to it.

Hey kids, remember to adjust your withholding when you get that COLA/raise, bonus, or any other taxable income!

I set up a spreadsheet with an entry for every payday's income and withholding, and estimated my interest income and deductions and calculated what my taxable income and the tax on that income would be.

I adjusted my withholding mid-year to cover my taxes with a planned Roth IRA conversion of $13K. Expected to owe about $100, but it turns out that I overpaid by $5 after factoring in the $30 refund of telephone taxes.

Spreadsheet method works well for someone like me who does my own taxes and has even a modest ability to set up a spreadsheet.

Actually, the savings for many could be more than $58.44.

That is for those who use the government to enforce savings through the year, but then are so anxious to get their money that they pay usurious interest rates for a refund anticipation loan.

As a CPA I have a leg up on predicting all this rather correctly but I err on owing a little more than getting a refund.

When people ask "how we do it?" - survive with kids on 1 income - this is a big part of it. We don't let the govt hold $2k-$10 of our income all year long, unnecessarily. $2k - $10k being the average refunds my friends will inevitably brag about every year - and go spend right away. It's such a weird mindset to me. Like it is a free gift rather than your hard-earned income. To me $10k is a full ROTH contribution next year - for my husband and I - but I am a weirdo, because I rather invest in my future than blow $10k.

The IRS online calculator is rather good - I recommend it all the time.

My biggest wild card is capital gains. I withhold too much from my salary to account for capital gains I'll get throughout the year.

The comments to this entry are closed.

Start a Blog


Disclaimer


  • Any information shared on Free Money Finance does not constitute financial advice. The Website is intended to provide general information only and does not attempt to give you advice that relates to your specific circumstances. You are advised to discuss your specific requirements with an independent financial adviser. Per FTC guidelines, this website may be compensated by companies mentioned through advertising, affiliate programs or otherwise. All posts are © 2005-2012, Free Money Finance.

Stats