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Tax Question

Old 03-15-2009, 04:07 PM
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I have a quick question for you guys on here. I filed my taxes and got about a $1100 refund, I claimed 0 on my exemptions/allowances, don't own a home, don't own a business or have anything other than filing basic taxes. I make ~$29k/year.

My fiance had 3 jobs last year and was on inemployment for a month. She filed her taxes and it came back that she owed $70. She claimed 2 on her exemptions/allowaces at each of her jobs. It appears that at one of her companies (she worked at the place for about 8 months), they didn't take enough money. But I'm no tax expert! She did contribute a couple 100 to her 401k before being laid off in Oct. She made $30k/year.

My question is, our situation, is it better to claim 0 or 2? Its annoying when you owe the IRS money esspecially when you barely make enough money to get by. Any one have any suggestions? I hate the IRS

Thank you.

Last edited by bstnsportsfan; 03-15-2009 at 04:09 PM.
Old 03-15-2009, 04:29 PM
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Claim the deductions you are due and make sure to check you pay slip for the appropriate deductions.

Then you will not be giving the IRS a loan or owe them anything.
Old 03-15-2009, 05:08 PM
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Basically, I guess what Menzies is saying, is claim the number of exemptions on your W-4 form that you expect to claim on your tax return. So in the case that you are a single filer(and not be able to be claimed as a dependent on someone else's (ie, parent's) return, he is recommending checking the single box and claiming 1 exemption.

As you can see with the difference between you and your girlfriend, the number claimed will have an effect on the taxes withheld from each paycheck, with the higher the number, the less federal withholding will be taken out from each check.

The purpose of the w-4 form is to try to get it that the taxes withheld during the year will equal the taxes to be paid on that income, so ideally, there will be nothing due to the irs or the taxpayer when the income tax return is prepared. As with most things related with our govt. , this rarely happens.

In a way, it is really up to you. Many people like having "forced savings" in the form of overpaying taxes during the year and getting a refund in April, so by continuing to use 0, this should put you into that situation (provided you do not have other forms of income such as capital gains). The negative - you are in effect giving the fed an interest-free loan.

Your girlfriend can continue to use 2 and have a tax bill come April.

Be aware that if you owe too much money come the time you file the tax return, you can fail to meet certain "safe-harbors" and be hit with penalties and interest because you failed to pay enough tax during the year in which the income was earned.

So, to directly answer your question, decide what you want to do. (All assuming single filer wit h 1 personal exemption taking the standard deduction). Do you want a refund in april (0 exemption)/want to be flat at tax time (1 exemption) /or want to pay a tax bill with your return (2 exemption).

Some will correctly say that it would be better not to give the IRS extra money each paycheck and put that extra money into a bank account and earn interest on it, but you need to weigh that against your ability to put this money aside and not spend it on something else, potentially leaving you unable to pay your taxes once you complete your tax return.

Last edited by chrisjb; 03-15-2009 at 05:10 PM.
Old 03-15-2009, 05:58 PM
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Chris- Your a genius! Now I understand exactly why she essentially got a bill and I got a nice check. You also saved us a lot of aggravation. So it seems that is worth claiming 2 if you make a decent amount of money and your interest on the money will be enough to pay the IRS. By the way, are you a CPA? Thanks again!!
Old 03-15-2009, 06:04 PM
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If you make a "decent amount of money" you may want to be claiming more than 2. Do you own a house and have a mortgage, you should claim enough deductions to cover the interest. Claim an additional deduction for each child/dependent etc.

But at an $1100 refund, I would start off with 2 this year and see how everything shakes out with the tax changes rather than trying to go higher.
Old 03-15-2009, 06:43 PM
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Menzies- At this point in life, I have no children and no home. I personally like getting more taken out then getting some back in the spring time. Hopefully in a few years, I can get into home ownership then I can learn that part of taxes. Thanks your help.
Old 03-15-2009, 06:43 PM
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The unemployement likely had no taxes withheld. It is taxable, created the tax due. 2 exemptions when you only have one will create under withholding.
Old 03-15-2009, 06:49 PM
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Originally Posted by GWcpa View Post
The unemployement likely had no taxes withheld. It is taxable, created the tax due. 2 exemptions when you only have one will create under withholding.
Actually chose to have taxes taken out, they give you the option. She was on unemployment for a month and they took $75 out. I believe Barack change it now so that for the 1st 10 weeks (or so) you don't get taxed. Luckily she was able to find employment quickly.
Old 03-16-2009, 03:30 AM
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Claim zero on your W-4, most people had rather get money back than pay and yes I hear that old argument that "I do not like them holding my money" and I understand that but the biggest percentage of people DO NOT SAVE and this is a forced savings.

If a person claims 1 on their W-4 and does not have anything else to deduct you will almost owe every time.
Old 03-16-2009, 05:48 AM
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Originally Posted by bstnsportsfan View Post
Chris- So it seems that is worth claiming 2 if you make a decent amount of money and your interest on the money will be enough to pay the IRS. By the way, are you a CPA? Thanks again!!
That's not really a true statement. The allowance number should be dictated by what you estimate your final tax will be versus the amount of income you are making. For example, if you itemize on your return versus taking the standard deduction, you could increase the allowance number to get your "tax refund" in hand on every paycheck versus waiting until you get a large refund check 4 months into the next year.

I think it is safe to say that you will never be able to invest the underwithheld tax amount and make enough return to pay for the taxes in full. That said, in your situation, if, for example, you are carrying credit card balances at ie 10%, you would be better off overall financially by not overpaying your taxes and waiting for a refund, but paying down your balance monthly and receiving no tax refund. This all depends upon your personal financial discipline and specific financial situation.

Always remember, that the IRS does not like to "float" people on their tax liability and will charge interest and penalties if you underpay your taxes during the year. The interest and penalties can be substantial.

The "giving the interest free loan to the govt" I and others referred to is a reality, but it is more of an emotional issue than financial. Many people have the attitude of "not giving the IRS one more dime than they are entitled to." At the end of the day, it doesn't really add up to all that much. So it's not that costly of a "forced saving plan" if that is the only way you are able to set aside money.

I practiced as a CPA for about 10 or so years, mainly dealing in corporate/partnership matters, but inevitably had to dable in personal taxes.

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