Rich Carreiro <rlc-news[at]rlcarr.com> wrote:
- quote -

I thought so too, but not exactly: 1-2 will be the correct
withholding. 7 will leave him underwithheld, but with no
penalty (because he'll have paid more withholding than his
total tax bill for this year). So if he's disciplined
enough to stick the extra money in the bank, he's better off
not amending his W-4 until the following year.

Seth

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direwolf1973[at]gmail.com writes:

- quote -

The 7 is probably correct. This is a known anomaly that
results from you starting your job mid-year. At the start
of next year you'll need to drop back to 1 or 2.

The deal is that the tables which tell your employer
how much to withhold given the number of exemptions
assume you're working a full year. But for this
year, you didn't. So if you claim the typical 1-2
exemptions, you'll be massively overwithheld.

But again, you will need to switch to 1-2 at the
start of next year. For a full year 7 will leave
you massively underwithheld.

--
Rich Carreiro rlc-news[at]rlcarr.com

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direwolf1...[at]gmail.com wrote:

- quote -

OK. I haven't done an actual tax calculation to verify the
results, but the results seem plausible FOR THE REMAINDER OF
THIS YEAR ONLY.

That is the important issue. The reason it only applies for
this year is that you are starting your job at mid year.
But the withholding tables implicitly assume that your
income is earned at the current rate over the entire year.
Since the tax rate structure is progressive (both in rates
and because of standard deductions, personal exemptions,
etc.), having only half the annual income will cause a tax
bill that is less than half the full year tax bill. This is
especially true at the lower end of the income scale.

So, that is why -- for a half-year of income -- the
calculator would recommend a higher number of withholding
allowances than for a full year's income.

- quote -

It may be worth also running the calculator based on a full
year's income and seeing what the difference is. You would
need to switch to that come January anyway.

- quote -

This is a reasonable financial decision as far as it goes.
The key question, though, is whether you would be able to
absorb the increase in withholding when it strikes next
January? At that point it is likely that you would have to
substantially reduce the number of allowances, and then your
income would suddenly shrink. Since I haven't run any
numbers, I can't say if it would have to shrink by
$600/month, but that is certainly possible.

The problem is that expenses have this nasty habit of
increasing to consume all available income, which is why
having income reductions tend to hit really hard. That
means that if you take the increased withholding allowances
for this half year, you should put the $600/month into a
savings account, so that you can start building up an
emergency fund. You should not use it for the car payments,
since they will continue past the end of the year -- at
which point you will have to reduce allowances and increase
withholding.

If you feel you don't have the self-discipline to put that
money away, you may be better off taking the large refund
for the first year and using that to either fund an IRA or
establish an emergency savings fund.

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<direwolf1973[at]gmail.com> wrote:

- quote -

The normal withholding tables are based on you earning the
same amount every period. Since you're working for only
half the year, that means they withhold at a higher bracket
than you'll actually be in.

- quote -

Due to withholding at the higher bracket you aren't in.
That seems reasonable (though I didn't check the
arithmetic).

- quote -

Again, without checking the arithmetic, that seems
reasonable.

- quote -

That will be true next year, when you work for the full
year.

Seth

<< ------------------------------------------------------- > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2006) - All rights reserved. > << ------------------------------------------------------- >

I started my very first salary job on June 4th 2007, and I'm
totally confused about my W-4 and just how much tax is
withheld and now many allowences I should take. I don't
want a huge refund check next April. I simply want to
maximize my monthly income.

When I use the IRS W-4 calculator, it actually recommends
that I take 7 allowences on my W-4 so that I don't overpay
taxes next April. Here's the run down...

Filing Status: Single
Someone else can claim you as a dependent: No
Number of jobs: 1
Number of dependents: 0
Will you be 65 or older 1/1/2008: No
Are you blind: No
Child & dependent care credit qualifying persons: 0
Child & dependent care credit expenses: 0
Eligible children for child tax credit: 0
Other credits: 0
Total salary for 2007: 48,681 ($7,000 per month, paid
bimonthly except June)
Total retirement plans: 0
Tax withheld to date: 1,663 (for the full month of June)
Projected withholding for rest of year: 9,141
Total earned income other than salary: 0
Other nonwage income: 0
Adjustments to income: 0
Total itemized deductions: 0

The IRS calculator says that I'll actually overpay my Fedral
Income Tax by $4,399, and it recommends that I take 7
allowences for the remainder of the year to offset the
balance. According to this recommendation, that will leave
me with a refund check of around $200 next spring... which
would be just fine by me.

I'm not worried about the legal or financial questions here.
What I want to know is... Is this recommendation accurate?
Assuming that I've calculated my earnings correctly, will 7
allowences actually give me my maximum paycheck without
underpaying my income tax each pay period?

I'm asking because everyone I've talked to (not tax
professionals, just friends and family) says that I should
take 1 or 2 allowences max. But, according to the IRS, that
would give me a very large refund check next spring. I
would MUCH rather have the extra $600+ at the end of each
month than the extra $4000+ each spring. $600 per month
covers my car, which, at this point in my life, is a
substantial investment.

I hope someone out there can answer this. Thanks!

Btw, here's the link to the calculator...
http://www.irs.gov/app/cgi-bin/wh07.cgi/p5/en

Sincerely,
Brian Stone

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