I wanted to know if anyone has heard of putting "9" for the number of deductions on their W-2. A person suggested to me that is a way to give you a tax-free raise. Has anyone heard of this before?
I assume that you can put any number you would like. But, it's illegal!? ... LOL I've never heard of that one before. Maybe I'm wrong. If it was so, wouldn't everyone be doing it right now.
I think you are referring to the W-4 that you give your employer declaring the number of personal allowances you want used to compute your withholdings.
The idea is to claim the number of personal allowances that makes your withholdings equal your tax bill at the end of the year. If you claim too many personal allowances and don't have enough withheld, under certain circumstances you would have to pay an underpayment penalty.
I have heard of the strategy you suggest, used as follows. Sometime during the year, when your year to date income tax withholdings is equal to the amount of taxes you will have to pay (or at least equal to 90% of your expected tax bill), you file a new W-4 with your employer setting your personal allowances to 9. This effectively reduces your future income tax withholdings to zero, putting more take home cash in your pocket -- effectively a temporary pay raise. At the first of the next year, file a new W-4 setting your personal allowances back to where they were.
Fool hardy advice you are getting! First, the limit you can claim on the W-4 is 10 without getting prior IRS approval. If you try and claim more than 10 with your employer, your employer is required by law to send the request in to the IRS before making any adjustments to your withholding.
Second, DaveT correctly points out that you might get hit with an understatement withholding penalty if you do not have at least 90% of your prior year's income withheld. Thus, if you did not get a big tax deduction last year and you try and substantially increase your exemptions this year, you will likely have an understatment penalty next year. It is not good enough to underwithhold and pay in at the end of the year so that you get the interest on the money instead of the IRS.
Moreover, if you are a high income earner, the 90% withholding requirement actually increases to about 102% in certain circumstances.
So, unless you can justify the "9" on your W-4, you will likely have problems later.
Keep in mind that raising the exemptions will not reduce your social security tax withholdings, only your income tax withholdings.
I assume that you can put any number you would like. But, it's illegal!? ... LOL I've never heard of that one before. Maybe I'm wrong. If it was so, wouldn't everyone be doing it right now.
Ervan
edickens82@yahoo.com
MisterPags (Jason),
I think you are referring to the W-4 that you give your employer declaring the number of personal allowances you want used to compute your withholdings.
The idea is to claim the number of personal allowances that makes your withholdings equal your tax bill at the end of the year. If you claim too many personal allowances and don't have enough withheld, under certain circumstances you would have to pay an underpayment penalty.
I have heard of the strategy you suggest, used as follows. Sometime during the year, when your year to date income tax withholdings is equal to the amount of taxes you will have to pay (or at least equal to 90% of your expected tax bill), you file a new W-4 with your employer setting your personal allowances to 9. This effectively reduces your future income tax withholdings to zero, putting more take home cash in your pocket -- effectively a temporary pay raise. At the first of the next year, file a new W-4 setting your personal allowances back to where they were.
Yes I meant 9 on the W-4, not the W-2.
Thanks for your reply.
Jason
MisterPags:
Fool hardy advice you are getting! First, the limit you can claim on the W-4 is 10 without getting prior IRS approval. If you try and claim more than 10 with your employer, your employer is required by law to send the request in to the IRS before making any adjustments to your withholding.
Second, DaveT correctly points out that you might get hit with an understatement withholding penalty if you do not have at least 90% of your prior year's income withheld. Thus, if you did not get a big tax deduction last year and you try and substantially increase your exemptions this year, you will likely have an understatment penalty next year. It is not good enough to underwithhold and pay in at the end of the year so that you get the interest on the money instead of the IRS.
Moreover, if you are a high income earner, the 90% withholding requirement actually increases to about 102% in certain circumstances.
So, unless you can justify the "9" on your W-4, you will likely have problems later.
Keep in mind that raising the exemptions will not reduce your social security tax withholdings, only your income tax withholdings.
Hope that clarifies the issue,
Taxjunkie