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Should I change my W4 to not withhold any taxes (or at least withhold as little as possible) and just pay exactly what I need at the end of the year or or should I make my W4 so I pay just enough?

I'm paying $800 in taxes on each check. Out of $3500 I take home $2700. I'm claiming 7 on my W4. I believe I'm in the 25% bracket. I live in California. I have 2 children and I'm married. I have a 401K that I contribute to.

Basically the IRS is getting an interest free loan from me. I'd like to get interest from it instead. Obvious down side is that I'd be responsible for ~20k at the end of the year so careful management is critical.

I end up owing at the end of the year anyway due to other side work so I never expect a refund.

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  • Realize that a majority of that withholding is probably FICA... even if you changed to 99 dependents on your w-4 you will still have FICA. ~I hate FICA! – user4127 Jan 4 '12 at 20:11
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If you owe a lot of money (more then $500 or $1000) you will get hit with penalties. You will also have to file every quarter the next year. That is very painful. There is a safe harbor if you make sure that you have withheld more money than your taxes from the previous year.

The information you provided is not enough for me to give specific advice. But here is a hint: Right after you file this year, use turbo tax to determine what changes you can make to your withholding to minimize any excess withholding.

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  • What other info do you need? – ILovePaperTowels Jan 2 '12 at 1:51
  • Some of the numbers you mention don't make sense. If you have take home of $2700 from a gross of $3500 the $800 delta should not just be IRS taxes. The W4 will only change the federal withholding. The key to this answer is pay your taxes when you earn them, use the tools at the IRS website, and programs like Turbo Tax to adjust your withholding to not have to pay interest and penalties. – mhoran_psprep Jan 2 '12 at 13:15
  • Used the 2012 withholding calculator to determine how I should adjust my W4. I'll grab a copy of Turbo Tax and see how they match up. Thanks. – ILovePaperTowels Jan 2 '12 at 15:19
  • If it happens 2 years in a row you can get hit with penalties if it is a one time thing they generally let it slide... That said it does tend to draw eyes towards your return so if you are doing anything you think they might question best to avoid them. – user4127 Jan 4 '12 at 20:09
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If you don't withhold enough you'll pay penalties.

The best would be to withhold just enough not to have any additional liabilities or refunds at the end of the year. IRS gives you some space to play in case you miscalculate and withhold a little bit less (they'll "look the other way" if you end up withholding up to as low as 90% of your tax liability). Anything below that triggers penalties, interests and fees.

IRS pub 505 for details.

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  • 2
    +1 -- 2011 TurboTax is out now. It's easy to test to see when a penalty would kick in. Overpaying and getting a refund is an interest free loan to Uncle Sam, the tax you actually owe isn't due April 15th, it's due as you earn it – JTP - Apologise to Monica♦ Jan 2 '12 at 2:47
  • @JoeTaxpayer That is a great comment to put perspective on it, "...it's due when you earn it". – ILovePaperTowels Jan 2 '12 at 5:47

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