Being "entitled" to tax withholding allowances

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Roozbeh
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Being "entitled" to tax withholding allowances

Post by Roozbeh »

Filling form W-4 (and its state equivalent DE 4), both seem to talk about allowances one is "entitled" to.

Here is what W-4 says:
Whether you are entitled to claim a certain number of allowances or exemption from withholding is
subject to review by the IRS. Your employer may be required to send a copy of this form to the IRS.
Here is what IRS Pub. 505 says:
You can claim only the number of allowances to which you are entitled.
Here is what California DE 4 says:
Under the penalties of perjury, I certify that the number of withholding allowances claimed on this certificate does not exceed the number to which I am entitled [...]
When I fill the details of form DE 4, I get to 2 state allowances. If I use that for the rest of the year, I would get a $2000 state tax refund, and that's if we don't contribute to charity at all.

When I compute our California tax liability for 2012 and figure out the minimum number of allowances that would get me to no state tax refund, I get to 26 state allowances! If I claim 25, we would still get a refund! The main reason is that the worksheet in the DE 4 form does not include our tax situation.

Does anybody have any experience with IRS or state tax agencies regarding claiming more allowances than the worksheets compute?
Muchtolearn
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Re: Being "entitled" to tax withholding allowances

Post by Muchtolearn »

I always do singe 0 whether married ( a couple of times) or not. You are allowed to take as many allowances as you want regardless of what they say. They don't care as long as you withhold enough but even then they don't care as long as you pay an underwithholding penalty if applicable.
Tom_T
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Re: Being "entitled" to tax withholding allowances

Post by Tom_T »

They don't care, and I don't think they would even know. Also, the worksheet doesn't always give the best result. There was a time when 15 allowances was the best number for me. As long as I don't end up owing a ridiculous amount when I file my taxes, then it doesn't matter.
sscritic
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Re: Being "entitled" to tax withholding allowances

Post by sscritic »

I am not understanding your tax situation. If you have lots of deductions, they go on line 1 of the DE4. You get 1 allowance for every $1000 of deductions over the standard deduction as I read Worksheet B. Do you really get zero on line 8?
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Roozbeh
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Re: Being "entitled" to tax withholding allowances

Post by Roozbeh »

sscritic wrote:I am not understanding your tax situation. If you have lots of deductions, they go on line 1 of the DE4. You get 1 allowance for every $1000 of deductions over the standard deduction as I read Worksheet B. Do you really get zero on line 8?
We don't have much deductions, but an uncontrollable withholding percentage from bonuses. Taxes from bonuses are automatically withheld at 10.23% flat for California, ignoring whatever W-4 or DE 4 says.

DE 4's worksheets basically don't allow one to use uncontrollable or existing withholding of taxes to decrease one's withholding on normal paychecks. Its Worksheet C talks about estimates of taxed being withheld for the whole year, but only for increasing the withholdings.

And then on page 2 it says:
NOTIFICATION: Your employer is required to send a copy of your DE 4 to the Franchise Tax Board (FTB) if it meets either of the following two conditions:
  • You claim more than 10 withholding allowances. [...]
That slightly conftradicts DE 44, the employers' guide, where it says:
If you question the Form W-4 or DE 4 because it meets either of the following two conditions, then you must submit a copy of this form to the Franchise Tax Board (FTB) by fax at (916) 843-1094 or mail to the address shown below. Please retain the original form in the employee’s payroll records.
  • The employee claims more than 10 withholdings. [...]
What is it supposed to mean for an employer to question an employee's form?!
sscritic
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Re: Being "entitled" to tax withholding allowances

Post by sscritic »

Roozbeh wrote: We don't have much deductions, but an uncontrollable withholding percentage from bonuses. Taxes from bonuses are automatically withheld at 10.23% flat for California, ignoring whatever W-4 or DE 4 says.
Then I have no good advice, other than to increase your income to the level that your marginal rate is 10.3%. The FTB assumes you have a taxable income of $1 million,* so you need that 10.3% withholding.

* The top rate is 9.3%, but the Mental Health Services Act Tax adds 1% on incomes over $1 million according to most of what I can find, but one website said $2 million for a couple. That's not what the FTB says.

Actually, I do have a good idea. Talk to your employer. Your statement about "automatic" withholding at 10.3% is not correct. They don't have to withhold 10.3%. (I love to search, in case you haven't noticed. Bogleheads give me the subject, search gives me the answers, sometimes.)
When supplemental wages are not paid at the same time the employee’s regular wages are paid, you may choose one of two methods for determining the amount of PIT to withhold:

Compute the amount of PIT to withhold based on the total of the supplemental wages and the employee’s current or most recent regular (gross) wage payment. The computed tax minus the tax already withheld from the regular wages is the tax to be withheld from the supplemental wages, or

• Withhold at a flat rate without allowing for any withholding exemptions claimed on the employee’s withholding allowance certificate. For stock options and bonuses that were paid on or after November 1, 2009, the flat rate is 10.23 percent. For other types of supplemental wage payments made on or after November 1, 2009, the flat rate is 6.6 percent. (Note: Supplemental wage payments made prior to November 1, 2009, were subject to rates of 9.3 and 6 percent respectively.)
http://www.edd.ca.gov/pdf_pub_ctr/de231ps.pdf
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Re: Being "entitled" to tax withholding allowances

Post by mhc »

Tom_T wrote:They don't care, and I don't think they would even know. Also, the worksheet doesn't always give the best result. There was a time when 15 allowances was the best number for me. As long as I don't end up owing a ridiculous amount when I file my taxes, then it doesn't matter.

I'm not sure this is true. I am on a permanent blacklist with the Federal IRS for claiming too many exemptions. I know some laws have changed since I got on the blacklist, but I still have to ask permission of the IRS to increase my exmemptions when I try to exceed a threshhold set by them.

I know the IRS cared when I claimed 15 exemptions and I could only justify 2 back around 2000.
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Muchtolearn
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Re: Being "entitled" to tax withholding allowances

Post by Muchtolearn »

mhc wrote:
Tom_T wrote:They don't care, and I don't think they would even know. Also, the worksheet doesn't always give the best result. There was a time when 15 allowances was the best number for me. As long as I don't end up owing a ridiculous amount when I file my taxes, then it doesn't matter.

I'm not sure this is true. I am on a permanent blacklist with the Federal IRS for claiming too many exemptions. I know some laws have changed since I got on the blacklist, but I still have to ask permission of the IRS to increase my exmemptions when I try to exceed a threshhold set by them.

I know the IRS cared when I claimed 15 exemptions and I could only justify 2 back around 2000.
I think its about 10 where you have to justify it. I don't know though as I always do single zero.
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Re: Being "entitled" to tax withholding allowances

Post by mhc »

It you use be that 10 would cause your company to submit your w-4 to the IRS, but I have been told companies no longer are required to do this.
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grabiner
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Re: Being "entitled" to tax withholding allowances

Post by grabiner »

Roozbeh wrote:Filling form W-4 (and its state equivalent DE 4), both seem to talk about allowances one is "entitled" to.

Here is what W-4 says:
Whether you are entitled to claim a certain number of allowances or exemption from withholding is
subject to review by the IRS. Your employer may be required to send a copy of this form to the IRS.
Here is what IRS Pub. 505 says:
You can claim only the number of allowances to which you are entitled.
Also from Publication 505 (page 7):
You do not have to use the Form W-4 worksheets if you use a more accurate method of determining withholding allowances.

The method you use must be based on withholding schedules, the tax rate schedules, and the 2012 Estimated Tax Worksheet in Chapter 2. It must take into account only the items of income, adjustments to income, deductions, and tax credits that are taken into account on Form W-4.
Publication 919 gives more extensive worksheets, but even they do not cover all of the necessary situations. If your calculations show that you can expect to cover all your taxes with a given number of allowances, you should be allowed to claim them.
Here is what California DE 4 says:
Under the penalties of perjury, I certify that the number of withholding allowances claimed on this certificate does not exceed the number to which I am entitled [...]
When I fill the details of form DE 4, I get to 2 state allowances. If I use that for the rest of the year, I would get a $2000 state tax refund, and that's if we don't contribute to charity at all.
There is a worksheet on DE-4 which allows you to adjust for deductions; if you expect to contribute $5000 to charity, then you should claim five more exemptions, so your tax due should break even.

CA normally follows federal tax law except when it explicitly chooses to disagree. I don't know whether the rule allowing you to ignore the form is valid in CA, so you should check with your tax advisor. (However, when CA increased withholding rates but not tax rates, the Franchise Tax Board commissioner said that taxpayers could adjust their withholding accordingly.)
When I compute our California tax liability for 2012 and figure out the minimum number of allowances that would get me to no state tax refund, I get to 26 state allowances! If I claim 25, we would still get a refund! The main reason is that the worksheet in the DE 4 form does not include our tax situation.
One reason for the huge number is that a CA allowance is $1000, while a federal allowance is $3800. If you are paying $19,000 in mortgage interest, that is 19 extra CA allowances but 5 extra federal allowances.
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Roozbeh
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Re: Being "entitled" to tax withholding allowances

Post by Roozbeh »

Thanks so much everybody. Bogleheads rock! I can't think of any better place to help wrap my head around all these issues. The amount of money we're going to save based on what I've learned from the wiki, the books, and the forum is amazing.
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Roozbeh
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Re: Being "entitled" to tax withholding allowances

Post by Roozbeh »

sscritic wrote: Then I have no good advice, other than to increase your income to the level that your marginal rate is 10.3%. The FTB assumes you have a taxable income of $1 million,* so you need that 10.3% withholding.

* The top rate is 9.3%, but the Mental Health Services Act Tax adds 1% on incomes over $1 million according to most of what I can find, but one website said $2 million for a couple. That's not what the FTB says.
Further research made me figure out that California is withholding everything at 10% extra. Say if someone is in the 8% bracket, 8.8% is withheld at the margin. Can't tell you why, but I don't think it's because of the 1% millionaire tax. So it's really 9.3%*1.1=10.23%.

In the meanwhile, I figured out that if we claim the charitable contributes we plan to make, we can get more allowances. I also went through some scary form (FTB 5805) and found out that it's not enough to have 90% of this year's or 100% of last year's tax withheld in order to not owe any penalty. It's not exactly like the federal safe harbor requirements. One also needs to have some minimums withheld by certain dates. It's pretty complex. So in the meanwhile, we are not claiming all the allowances we can to make sure we meet those mid-year minimums. We'll increase it after the minimums got met.
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Re: Being "entitled" to tax withholding allowances

Post by scrabbler1 »

Muchtolearn wrote:
mhc wrote:
Tom_T wrote:They don't care, and I don't think they would even know. Also, the worksheet doesn't always give the best result. There was a time when 15 allowances was the best number for me. As long as I don't end up owing a ridiculous amount when I file my taxes, then it doesn't matter.

I'm not sure this is true. I am on a permanent blacklist with the Federal IRS for claiming too many exemptions. I know some laws have changed since I got on the blacklist, but I still have to ask permission of the IRS to increase my exmemptions when I try to exceed a threshhold set by them.

I know the IRS cared when I claimed 15 exemptions and I could only justify 2 back around 2000.
I think its about 10 where you have to justify it. I don't know though as I always do single zero.
I recall in my first year of working (1985, when there were lots of marginal tax brackets), I started in the middle of the year and realized that I would have taxes withheld at my annual income rate which would result in way too much taken out. I figured out that declaring 12 exemptions on my W-4 would result in an amount of taxes withheld which would be very close to what would be due. Back then, there was no problem putting 12 on there although my payroll department rep asked me if I were sure it was correct. I said it was.

It worked out perfectly because I ended up owing or receiving less than $100 on my federal and state tax returns while seeing an extra $160 in each biweekly paycheck for the rest of the year. The following year, I had to cut it back to a more typical level, resulting in a net pay "cut" despite a small pay raise I got at the start of the year.

Some years later, I heard that putting 10 or more on the W-4 had to be justified. Not sure if what I figured would count but even a 9 on the W-4 would have gotten me very close.
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Re: Being "entitled" to tax withholding allowances

Post by sscritic »

Roozbeh wrote: Further research made me figure out that California is withholding everything at 10% extra. Say if someone is in the 8% bracket, 8.8% is withheld at the margin. Can't tell you why, but I don't think it's because of the 1% millionaire tax. So it's really 9.3%*1.1=10.23%.
Good catch. I wonder if this is relatively new. CA has been working hard to get those tax dollars coming in early. If you look at CA estimated payments, they front load those as well (they used to be equal payments, like for the feds).
Installments due shall be thirty percent of the required annual payment for the 1st required installment, forty percent of the required annual payment for the 2nd required installment, no installment is due for the 3rd required installment, and thirty percent of the required annual payment for the 4th required installment.
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Re: Being "entitled" to tax withholding allowances

Post by Mudpuppy »

sscritic wrote:
Roozbeh wrote: Further research made me figure out that California is withholding everything at 10% extra. Say if someone is in the 8% bracket, 8.8% is withheld at the margin. Can't tell you why, but I don't think it's because of the 1% millionaire tax. So it's really 9.3%*1.1=10.23%.
Good catch. I wonder if this is relatively new. CA has been working hard to get those tax dollars coming in early. If you look at CA estimated payments, they front load those as well (they used to be equal payments, like for the feds).
Installments due shall be thirty percent of the required annual payment for the 1st required installment, forty percent of the required annual payment for the 2nd required installment, no installment is due for the 3rd required installment, and thirty percent of the required annual payment for the 4th required installment.
CA's system is so complex that I've about thrown my hands up at trying to minimize my return while avoiding penalties. And this is with having a paycheck calculator as a state employee from a state website that precisely (within a penny) let's me know what CA tax would be withheld for any given state withholding value. Now I'm happy if my projected return on my tax estimate spreadsheet is under $500 once I plug in the results from the state paycheck calculator.

There's also been a lot of press release lately that if you just put your full property tax payments on the return, without adjusting for the non-deductible parts, they'll be watching for that in CA. Personally, I don't mind that since that's what I've been doing all along. However, I'm having to manually override TaxAct repeatedly to stay within the rules on that one, since it wants to take the amount on the 1098 form sent by the mortgage servicer, even though the full amount of that is not deductible. I don't recall it being this hard with TurboTax in years past, but I went for TaxAct this year because I got a good deal on it. So if you're using TaxAct, be on the watch for that one and do a manual override as needed.
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Re: Being "entitled" to tax withholding allowances

Post by grabiner »

scrabbler1 wrote:I recall in my first year of working (1985, when there were lots of marginal tax brackets), I started in the middle of the year and realized that I would have taxes withheld at my annual income rate which would result in way too much taken out. I figured out that declaring 12 exemptions on my W-4 would result in an amount of taxes withheld which would be very close to what would be due. Back then, there was no problem putting 12 on there although my payroll department rep asked me if I were sure it was correct. I said it was.

It worked out perfectly because I ended up owing or receiving less than $100 on my federal and state tax returns.
If you use the estimated tax calculator on the IRS's own website, it will tell you how many allowances to claim in order to cover your tax for the rest of the year, and it will handle situations like yours the way you did. Thus, if you claimed one allowance and should have been claiming four, or if you properly claimed one allowance but then got an extra $11,400 deduction (equivalent to three allowances), and you run the IRS calculator in October, the calculator will tell you to claim 13 so that your withholding for the whole year is right.
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Re: Being "entitled" to tax withholding allowances

Post by scrabbler1 »

grabiner wrote:
scrabbler1 wrote:I recall in my first year of working (1985, when there were lots of marginal tax brackets), I started in the middle of the year and realized that I would have taxes withheld at my annual income rate which would result in way too much taken out. I figured out that declaring 12 exemptions on my W-4 would result in an amount of taxes withheld which would be very close to what would be due. Back then, there was no problem putting 12 on there although my payroll department rep asked me if I were sure it was correct. I said it was.

It worked out perfectly because I ended up owing or receiving less than $100 on my federal and state tax returns.
If you use the estimated tax calculator on the IRS's own website, it will tell you how many allowances to claim in order to cover your tax for the rest of the year, and it will handle situations like yours the way you did. Thus, if you claimed one allowance and should have been claiming four, or if you properly claimed one allowance but then got an extra $11,400 deduction (equivalent to three allowances), and you run the IRS calculator in October, the calculator will tell you to claim 13 so that your withholding for the whole year is right.
After 1985 I always had 0-3 exemptions depending on what my itemized deducitons were, and I was always able to figure out how many to use each year. And remember that back in 1985 there was no such thing as a "website" so all I had was pencil, paper, a calculator (maybe), and the withholding tables my payroll department used which somehow was barely enough for me to figure out that 12 was the magic number.
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