Thoughts on adjusting withholding for an expected tax credit?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
jimmyrules712
Posts: 442
Joined: Thu Jan 06, 2011 11:36 pm

Thoughts on adjusting withholding for an expected tax credit?

Post by jimmyrules712 » Mon Sep 18, 2017 1:02 pm

I'm currently working through the process of adopting a child. It is expected to be finalized in February 2018 and we will incur adoption related expenses and fees well over $20,000. There is a federal adoption tax credit worth $13,570 that can be claimed for any adoption expenses up to that amount which can be claimed for the tax year when the adoption was finalized. This means that despite the fact that we paid the $20k this year we can't get the credit until we file for 2018 taxes in 2019. We pay about $24k a year in taxes based on current income so that credit will be worth over half our tax obligation for the year 2018.

I'm thinking ahead and wondering if it wouldn't be a bad idea to adjust my withholding at work next year to take into account the credit. It would mean reducing my withholding by a little over half. I'll know in Jan/Feb that the adoption is final and has no chance of falling through so I think the only risk would be if the gov gets rid of the tax credit? Any thoughts?

avalpert
Posts: 6197
Joined: Sat Mar 22, 2008 4:58 pm

Re: Thoughts on adjusting withholding for an expected tax credit?

Post by avalpert » Mon Sep 18, 2017 1:11 pm

Unless you are really pinched for the cash flow I wouldn't adjust withholding to outside of the safe harbor amounts until later in the year - you don't know what income windfalls you may have, tax changes may happen (including eliminating or changing the credit you are expecting) etc.

User avatar
Kevin M
Posts: 8870
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: Thoughts on adjusting withholding for an expected tax credit?

Post by Kevin M » Mon Sep 18, 2017 1:21 pm

I probably would do it if I had fairly high certainty in my 2018 income. On the other hand, putting $1,000/month for 12 months into a savings account at 1.2% only earns you $66 in interest ( =FV(1.2%/12,12,-1000,0) ), so it's not that big of a deal.

Kevin
||.......|| Suggested format for Asking Portfolio Questions (edit original post)

rkhusky
Posts: 4405
Joined: Thu Aug 18, 2011 8:09 pm

Re: Thoughts on adjusting withholding for an expected tax credit?

Post by rkhusky » Mon Sep 18, 2017 2:23 pm

I would adjust withholding once I was sure. I prefer to owe a little at tax time and, given the rash of ID theft associated with tax returns, having a $13K refund sitting at the IRS for months would be irritating.

User avatar
Kevin M
Posts: 8870
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: Thoughts on adjusting withholding for an expected tax credit?

Post by Kevin M » Mon Sep 18, 2017 3:17 pm

rkhusky wrote:
Mon Sep 18, 2017 2:23 pm
I prefer to owe a little at tax time and, given the rash of ID theft associated with tax returns, having a $13K refund sitting at the IRS for months would be irritating.
Yeah, that would be more important to me than the little bit of interest I'd earn from the lower withholding, or than the small penalty I might pay if I under-withheld. I've paid small under-withholding penalties before--no big deal.

Kevin
||.......|| Suggested format for Asking Portfolio Questions (edit original post)

User avatar
grabiner
Advisory Board
Posts: 20871
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Thoughts on adjusting withholding for an expected tax credit?

Post by grabiner » Tue Sep 19, 2017 10:06 pm

The IRS worksheets tell you how to adjust, but they may be oversimplified for a tax credit this big; you may want to go through Publication 505 for more details.

Since you are in a 25% tax bracket, a $13,570 tax reduction is equivalent to reducing your income by $54,280. Given the value of an allowance ($4050 in 2017, probably a bit higher in 2018), that should be the equivalent of 13 allowances.

However, if you both work, this will be incorrect, because the withholding tables for married status are based on the assumption that only one person works. If you have about equal salaries, most of your withholding is based on a 15% tax bracket, which is why the IRS has worksheets in which you claim fewer allowances and possibly have extra withholding to get the withholding done properly at 25%. You will want to figure out how many withholding allowances for each of you will get the correct amount of reduced withholding.
David Grabiner

Post Reply