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A different approach to taxes? (USA income tax)

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strantor

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I've had a few bits of info bouncing around in my head for a few years that finally collided and formed an idea.

I'm a tax noob so please correct me where I'm wrong.

Info:
  • Once upon a time I was filling out a W4 and I was uncertain how many dependents to claim because my wife and stepdaughter were not in the country. I asked HRLady and she said something to the effect of: "I'm not qualified to advise you, but the way it works is: Your W4 doesn't have to be accurate, but your income tax filing at the end of the year does. If you're worried about having to pay at the end of the year, then file as a single person and you will be taxed at a higher rate. At the end of the year, if your tax professional deems that you can claim them, then claim them, and you will get a sizable tax refund."
  • Once upon a time a colleague told me something to the effect of: "The income tax that you pay throughout the year is effectively a loan that you are forced to float to the US government, for which you are paid no interest, and for which you don't even get back most of the principal."
Now, if HRLady is correct, then colleague is only partly correct; I'm not FORCED to float that loan to the government. I theorize that I could claim 99 dependents (or by some other method) to avoid paying any income tax during the year. Figuring the IRS takes roughly 30% of my money (Currently I claim less dependents than actual, to ensure I get a refund), instead of letting it languish in .gov coffers, I could put 30% of each of my (untaxed) paychecks into an investment account (IRA/stocks/bonds/etc.) so that it is performing for me throughout the year. Then at the end of the year I could calculate what I owe and cut the government a check from that account.

Is that reasonable? Possible? Are people doing it already? Why/Why not?
 
I've had a few bits of info bouncing around in my head for a few years that finally collided and formed an idea.

I'm a tax noob so please correct me where I'm wrong.

Info:
  • Once upon a time I was filling out a W4 and I was uncertain how many dependents to claim because my wife and stepdaughter were not in the country. I asked HRLady and she said something to the effect of: "I'm not qualified to advise you, but the way it works is: Your W4 doesn't have to be accurate, but your income tax filing at the end of the year does. If you're worried about having to pay at the end of the year, then file as a single person and you will be taxed at a higher rate. At the end of the year, if your tax professional deems that you can claim them, then claim them, and you will get a sizable tax refund."
  • Once upon a time a colleague told me something to the effect of: "The income tax that you pay throughout the year is effectively a loan that you are forced to float to the US government, for which you are paid no interest, and for which you don't even get back most of the principal."
Now, if HRLady is correct, then colleague is only partly correct; I'm not FORCED to float that loan to the government. I theorize that I could claim 99 dependents (or by some other method) to avoid paying any income tax during the year. Figuring the IRS takes roughly 30% of my money (Currently I claim less dependents than actual, to ensure I get a refund), instead of letting it languish in .gov coffers, I could put 30% of each of my (untaxed) paychecks into an investment account (IRA/stocks/bonds/etc.) so that it is performing for me throughout the year. Then at the end of the year I could calculate what I owe and cut the government a check from that account.

Is that reasonable? Possible? Are people doing it already? Why/Why not?

There is a nice little rule in the IRS that says 70% of your taxes must be paid at the end of each quarter (cumulatively). So, if you have to pay in more than 30% of what you owe at the end of the year, you get an additional penalty for not paying in enough during the year. Even if some income is from personal/freelance work. You still must file estimated tax forms at the end of each quarter.

Nice idea but you are not the first.

Also: I said, 70%, it may actually be 50% or some other number. I don't remember the exact rate where the penalty kicks in or where you are expected to send in estimated payments at the end of each quarter.

EDIT: I guess it is not necessarily a percentage, but $1000.
https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Estimated-Taxes

There are other rules and you may have less lee-way on filling out your W-4 than you think. That is, you can claim fewer but not more - accuracy counts if you are borrowing from Gov.
 
I am not qualified to advise on taxes; however, over deductions will result in a substantial underpayment penalty. That penalty is far in excess of what most investors would gain on the "loan" to the government.

There are some other considerations:
1) It is against the law to make a statement that you know to be false. There is some wiggle room. For example, when both spouses work and claim their actual # of dependents, it is entirely likely that they will owe taxes and pay a penalty on that underpayment, even though one might think that was entirely done honestly. Honesty doesn't pay taxes. You have the option of making additional payments during the year, which is probably the best option. You can also under claim the number of dependents.
2) The "loan" to the government is entirely without basis, unless you get a refund. Only the refunded amount is a loan. Your taxes are due monthly or quarterly depending on your personal financial situation. In fact, some people have to pay taxes on money as soon as it it earned -- so called "withholding." In theory, if your income is not evenly distributed throughout the year, you can pay an amount correct for each quarter. That is complicated, so many people know they have end of year income pay taxes on that income throughout the year. It is entirely possible to get a substantial refund and still pay an underpayment penalty because of the way tax due and income realized are counted.

John
 
  • Once upon a time I was filling out a W4 and I was uncertain how many dependents to claim because my wife and stepdaughter were not in the country. I asked HRLady and she said something to the effect of: "I'm not qualified to advise you, but the way it works is: Your W4 doesn't have to be accurate, but your income tax filing at the end of the year does. If you're worried about having to pay at the end of the year, then file as a single person and you will be taxed at a higher rate. At the end of the year, if your tax professional deems that you can claim them, then claim them, and you will get a sizable tax refund."
  • Once upon a time a colleague told me something to the effect of: "The income tax that you pay throughout the year is effectively a loan that you are forced to float to the US government, for which you are paid no interest, and for which you don't even get back most of the principal."

When working there were many guys that used double their actual dependents. Kind of like your second scenario. I always stayed with your first scenario. I'm weird I guess because I see the first way as a small penalty for living in America, and being patriotic. Plus getting a lump sum at the end of the year, that you can actually do something with. Instead of a small dribble each payday that isn't noticed.
 
Strantor,

The US tax system is a pay as you go. If you owe more than a grand when you file, you could be subject to a penalty. They do consider if you paid 100 percent of you taxes in the previous year.

OK, about the W4. The IRS would like a zero net at the end of the year. You don't owe them and they don't owe you.

The problem is, people have other taxable income that isn't enough to have withholdings. IRS Pub 15A has the withholding calculations. It assumes there is ONE income supporting a family. You also can have taxable social security income, up to 85% can be subject to the income tax. You must tell SSA to take out an amount. This usually happens when you take social security before the full retirement age of you AND your spouse, if any.

Then there is the early withdrawals of retirement funds. They typically take out the 10% penalty and 10% tax. You withdrawal 50k and you jumped a shitload of tax brackets when that is added to your normal income. Having only 10% taken out and your in the 38% bracket, well, pay up.

Dabble in online sales or have a struggling business?

There are many ways to owe. Now, claiming single zero, they take out the maximum tax. But can be a buffer to help should you have any of the many scenarios that can increase your taxes owed.

A friend of mine owed last year, caused by SS, he changed his W4 to S0, and got back money this year. Some people see their return as vacation money, some see it as a new pool stick, and others see it as a weekend at the casino.

Even when people adjust their W4 to pay in more money, but not enough to satisfy their tax requirements, the still get upset.

Married couples, both working, both claiming the correct number, can easily faill on the owe side of the ledger at tax time.

I always advise S0, but, you know your financial situation better than I. Especially if you have other income, go S0.
 
Damn. I should have known. If it benefits me, it's probably against the rules.
That is true and applies beyond the IRS - it works that way with my wife, too. As soon as I have an idea that benefits me, she makes a rule.
 
It's not against the rules ... You can claim whatever. When you substainate that claim at tax time, you will see any errors in the claim. It all depends on which side you want to be on in April .... Receive or send

Then again, a nice refund could be a nice piece of test equipment you been eyeballing.
 
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