CA tax withholding rate to increase

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Specialized
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CA tax withholding rate to increase

Post by Specialized » Sun Nov 01, 2009 11:34 am

Starting today, the California state government is increasing the tax withholding rate, but not the tax rate:

http://www.latimes.com/business/la-fi-s ... 8140.story
Starting Sunday, cash-strapped California will dig deeper into the pocketbooks of wage earners -- holding back 10% more than it already does in state income taxes just as the biggest shopping season of the year kicks into gear.

Technically, it's not a tax increase, even though it may feel like one when your next paycheck arrives. As part of a bundle of budget patches adopted in the summer, the state is taking more money now in withholding, even though workers' annual tax bills won't change.
To minimize the effect on their tax refunds/payments, California residents should claim a larger number of deductions:
Savvy taxpayers can get around the state's maneuver by increasing the number of personal withholding allowances they claim on their employer tax forms, said Brenda Voet, a spokeswoman for the state's Franchise Tax Board.

"People can get out of this," she said, noting that most people would have to change their allowances through their employers. California's budget leaders are banking on the hope that most won't.

renter
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Post by renter » Sun Nov 01, 2009 11:59 am

Thanks for the heads up.

sscritic
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Re: CA tax withholding rate to increase

Post by sscritic » Sun Nov 01, 2009 12:25 pm

Specialized wrote: To minimize the effect on their tax refunds/payments, California residents should claim a larger number of deductions
While it is true that I can minimize the effect on my tax payment due next April, I appreciate that the withholding is being increased so my payment next April will be smaller. This is the opposite of many tax changes lately that have reduced withholding and increased the amount I owe in April.

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Post by AQ » Sun Nov 01, 2009 12:30 pm

We're constantly warned if one is not careful, someone will take advantage of you. Look at who is someone!

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Specialized
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Re: CA tax withholding rate to increase

Post by Specialized » Sun Nov 01, 2009 1:06 pm

sscritic wrote:
Specialized wrote: To minimize the effect on their tax refunds/payments, California residents should claim a larger number of deductions
While it is true that I can minimize the effect on my tax payment due next April, I appreciate that the withholding is being increased so my payment next April will be smaller. This is the opposite of many tax changes lately that have reduced withholding and increased the amount I owe in April.
If you haven't already, set your number of deductions to zero. If you still owe the state a large amount of money every April, consider making quarterly payments during the tax year. Depending on how much you owe, you may be required to do this to avoid penalties.

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Re: CA tax withholding rate to increase

Post by sscritic » Sun Nov 01, 2009 1:18 pm

Specialized wrote: If you haven't already, set your number of deductions to zero. If you still owe the state a large amount of money every April, consider making quarterly payments during the tax year. Depending on how much you owe, you may be required to do this to avoid penalties.
I do send in estimated payments. I have one out-of-state pension that doesn't do CA withholding. Social security also does not do CA withholding (it isn't taxed in CA, but, if it were possible to withhold CA tax, I might have used it instead of the estimated payments).

What bothers me is that you plan, and then some congress or legislature decides to change the rules. Most of the time, it messes me up by making me increase my estimated payments (fed and state) or final tax payment, but this time it actually helps a little for someone in my situation.

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Re: CA tax withholding rate to increase

Post by Parthenon » Sun Nov 01, 2009 2:55 pm

Specialized wrote:Starting today, the California state government is increasing the tax withholding rate, but not the tax rate:

http://www.latimes.com/business/la-fi-s ... 8140.story
Starting Sunday, cash-strapped California will dig deeper into the pocketbooks of wage earners -- holding back 10% more than it already does in state income taxes just as the biggest shopping season of the year kicks into gear.

Technically, it's not a tax increase, even though it may feel like one when your next paycheck arrives. As part of a bundle of budget patches adopted in the summer, the state is taking more money now in withholding, even though workers' annual tax bills won't change.
To minimize the effect on their tax refunds/payments, California residents should claim a larger number of deductions:
Savvy taxpayers can get around the state's maneuver by increasing the number of personal withholding allowances they claim on their employer tax forms, said Brenda Voet, a spokeswoman for the state's Franchise Tax Board.

"People can get out of this," she said, noting that most people would have to change their allowances through their employers. California's budget leaders are banking on the hope that most won't.
The bigger problem that comes up in April is when you file your income tax with the state and they don't have enough to pay you so they issue an I.O.U.

I would rather owe them as much as I can before getting into a penalty situation.

Ed
"What am I gonna do if I run out of money?"

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Post by indexfundfan » Sun Nov 01, 2009 5:39 pm

I recalculated my tax withholding such that I am just slightly above the 90% mark. I don't want to have the state owe me money because I do not like giving the state an interest-free loan, and the budget problems would still probably be around next Mar/April and your tax refund would be delayed.
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Re: CA tax withholding rate to increase

Post by celia » Mon Nov 02, 2009 2:03 am

Specialized wrote:Starting today, the California state government is increasing the tax withholding rate, but not the tax rate:
This is NOT TRUE. In February 2009, the legislature increased the top tax rate by 0.25 per cent, retroactive to January 1. See near the bottom at the CALPERS Tax Info page.

I suppose you could truthfully say the tax rate is not changing on November 1, just the withholding. But since taxes are usually thought of on a yearly basis, I think it is fairer to admit we were bumped up 1/4 of a per cent for 2009.

In case you were not aware, the increase in withholding is just a temporary way for the state to have a short-term interest-free loan until the citizens file their taxes.

celia

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Re: CA tax withholding rate to increase

Post by sscritic » Mon Nov 02, 2009 8:58 am

celia wrote: In case you were not aware, the increase in withholding is just a temporary way for the state to have a short-term interest-free loan until the citizens file their taxes.
There are three cases:
1) You would otherwise have gotten a refund in April. This is a short-term loan.

2) You would otherwise have owed taxes in April and will still owe taxes. This is just collecting the taxes when due. It is not a loan.

3) You would otherwise have owed taxes in April but will get a refund as a result of increased withholding. Part of the new withholding is collecting taxes when due and part is a short-term loan.

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Re: CA tax withholding rate to increase

Post by Specialized » Mon Nov 02, 2009 10:02 am

celia wrote:
Specialized wrote:Starting today, the California state government is increasing the tax withholding rate, but not the tax rate:
This is NOT TRUE. In February 2009, the legislature increased the top tax rate by 0.25 per cent, retroactive to January 1. See near the bottom at the CALPERS Tax Info page.

I suppose you could truthfully say the tax rate is not changing on November 1, just the withholding. But since taxes are usually thought of on a yearly basis, I think it is fairer to admit we were bumped up 1/4 of a per cent for 2009.

In case you were not aware, the increase in withholding is just a temporary way for the state to have a short-term interest-free loan until the citizens file their taxes.

celia
I may be remembering incorrectly, but I think my withholding rate went up in February when the tax rate went up. In any case, the LA Times article says the withholding rate is going up by 10%. A 10% increase on the old top tax rate of 9.3% would be 0.93%, while the actual tax increase was only 0.25%. From the way I read it, most people will be giving the state an interest-free loan indefinitely unless they change their number of deductions (higher refund would happend every year).

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indexfundfan
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Post by indexfundfan » Mon Nov 02, 2009 3:00 pm

As far as I know, the original withholding (for most people anyway) was 9.3% at the beginning of the year.

In Apr/May, this was increased to 9.55% due to the 0.25% basis point tax increase.

This month, this increases further to 1.1 * 9.55 = 10.505%.

This new rate could stay for a while. File a new DE-4 to reduce the tax withholding. It's better to owe the state taxes; you don't want to get an IOU come April 2010.
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Re: CA tax withholding rate to increase

Post by grabiner » Tue Nov 03, 2009 12:41 am

Specialized wrote:To minimize the effect on their tax refunds/payments, California residents should claim a larger number of deductions:
Savvy taxpayers can get around the state's maneuver by increasing the number of personal withholding allowances they claim on their employer tax forms, said Brenda Voet, a spokeswoman for the state's Franchise Tax Board.

"People can get out of this," she said, noting that most people would have to change their allowances through their employers. California's budget leaders are banking on the hope that most won't.
And there is an inducement on the state form not to do it. You must certify under penalties of perjury that you are entitled to the number of withholding allowances you claim. The federal W-4 has a similar statement, but the IRS withholding publication (Publication 505) says that you may use an alternative method than the rules on the form if it more accurately determines your tax liability, and contains a lot of worksheets for more detailed calculations. California usually adopts federal tax laws, so it may actually be legal to claim withholding equal to the tax you owe, but people who read the form may not realize that. (I cannot give tax advice here; check with your tax advisor before signing any tax form under penalties of perjury.)
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Post by gkaplan » Tue Nov 03, 2009 8:45 am

I doubt if this is going to impact me significantly. I make about $40,000 year and am maximizing my 401(k) contributions. Right now, my state tax withholding is just under $4.00 bi-weekly, so the additional withholding is like dimes.
Gordon

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celia
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Post by celia » Wed Nov 04, 2009 12:50 am

gkaplan wrote:I doubt if this is going to impact me significantly. I make about $40,000 year and am maximizing my 401(k) contributions. Right now, my state tax withholding is just under $4.00 bi-weekly, so the additional withholding is like dimes.
I guess we're all atypical in different ways. :lol:

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Post by mikep » Tue May 18, 2010 12:36 pm

From the CA form DE-4:
PENALTY: You may be fined $500 if you file, with no
reasonable basis, a DE 4 that results in less tax being
withheld than is properly allowable. In addition, criminal
penalties apply for willfully supplying false or fraudulent
information or failing to supply information requiring an
increase in withholding. This is provided for by Section
19176 of the California Revenue and Taxation Code.
My interpretation of these rules is the final tax withheld is the number they use, not the number of allowances you put on the form. And it is certainly reasonable to assume "properly allowable" means an amount that you expect to owe based on your expected AGI, deductions, exemptions and credits, not some inflated number so CA gets an interest free loan from you.

Of course, usual disclaimer re: tax advice applies, this is not tax advice ask your tax advisor.

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