9 personal allowances on W-4?

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Pointedstick
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9 personal allowances on W-4?

Post by Pointedstick » Thu Aug 17, 2017 4:16 pm

I'm starting a new job soon and filling out a W4 for the first time in many years. Following the instructions, I'm getting what seems like an absurd value for the number of personal allowances and was hoping for a quick spot check.

Box A: Nobody can claim me as a dependent: 1 allowance
Box B: I'm married, have only one job, and my spouse doesn't work: 1 allowance
Box C: I have a spouse: 1 allowance
Box D: I have two dependent children: 2 allowances
Box E: N/A
Box F: N/A
Box G: I will earn less than $100,000 this year and plan to take the child tax credit for both children, at two allowances each: 4 allowances total.


Adding all of that up, I get 9 allowances. Can that possibly be right?
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Re: 9 personal allowances on W-4?

Post by Pointedstick » Thu Aug 17, 2017 4:55 pm

Yeah. But will/can I get hit with a penalty for underpayment, though? (and if so, how much?) That would suck.
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Re: 9 personal allowances on W-4?

Post by Pointedstick » Thu Aug 17, 2017 9:45 pm

Good catch, Tenn. I was wondering what that part meant.
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Re: 9 personal allowances on W-4?

Post by WiseOne » Thu Aug 17, 2017 10:18 pm

I've learned that the only way to judge the number of allowances correctly is to use the IRS withholding calculator. Ignore the instructions on the form. You'll almost certainly end up with something wildly inaccurate. When I went from residency to my first real job, I stupidly followed the instructions on the W4, and got a huge shock the next spring when I found I owed almost $10K in taxes. Ouch!

https://www.irs.gov/individuals/irs-wit ... calculator

Beware that after you adjust the number of allowances for federal tax, your state taxes may get screwed up. Watch your first few paychecks to make sure your withholding is in the right ballpark.

p.s. congratulations on the new job!
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Re: 9 personal allowances on W-4?

Post by Xan » Thu Aug 17, 2017 11:07 pm

Don't do any withholding. Estimate your total tax bill for the end of the year, figure out your overall percentage, and then pay that fraction of your income each of the "quarterly" deadlines.
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Re: 9 personal allowances on W-4?

Post by Pointedstick » Thu Aug 17, 2017 11:10 pm

Xan wrote:Don't do any withholding. Estimate your total tax bill for the end of the year, figure out your overall percentage, and then pay that fraction of your income each of the "quarterly" deadlines.
That sounds like a huge hassle. Is this what you do? Am I wrong, and it's actually really easy? The IRS calculator said that I should probably apply for an exemption from withholding, go figure.
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Re: 9 personal allowances on W-4?

Post by moda0306 » Fri Aug 18, 2017 7:01 am

I usually like to know my tax liability, brackets, phase outs, etc within a few hundred by pretty early in the year. You should be able to use excel or a good tax planning app or software for that, or even use the 2016 software as a template. As for withholding, I haven't mastered the art of the calculators/worksheets/actual w/h yet, but I always figure I can change it if the numbers that get withheld are way out of line when I do the final math (basically, multiply current withholding times the periods remaining in the year and add already paid taxes).

My reasoning for this is wanting to graze the top of the 25% tax bracket for me, and phase outs for anyone I'm doing taxes for, but I'd prefer to do it with as little traditional Ira as possible so I can max my Roth IRA.

Underpayment penalties and interest aren't that much if you miss the mark, and you can always adjust withholding once you see the rate it's taking out. Personally, I would rather nail my tax tacticalizing (word?) in terms of brackets, credits and itemized optimization (including state), and maxing every account opportunity and screw up withholding than vice-versa. In fact, since I don't own a home, I perpetually am prepaying rent and grossly under-paying state taxes due to tax credits for the former and not being able to deduct the latter (yet) as itemized deductions (but when I do buy a home I'll get current year plus prior year's deduction). (Don't even get me started on not getting married in the eyes of the state and the various tax benefits that can come with that depending on incomes, housing and dependents).

I hope that's not too confusing and maybe it's more tangential to what you are asking than anything. Long story short, going with what they recommend should be safe enough to sleep at night, but you should already know close to what your 2017 taxes are going to look like, so you should be able to quickly reconcile the withholding ytd and going forward with what you estimate to owe.
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Re: 9 personal allowances on W-4?

Post by moda0306 » Fri Aug 18, 2017 7:15 am

I would have to respectfully disagree with Xan on estimates vs withholding. Withholding allows more year-end maximizing options without penalties for late payments. Payments don't let you bump all of it to the final two quarters without working that into your penalty calculation.
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Re: 9 personal allowances on W-4?

Post by WiseOne » Fri Aug 18, 2017 8:51 am

Estimated tax would work just fine as long as you pay quarterly, but it is a hassle and your HR department might get upset (i.e. more hassle explaining to them what you're doing). Moda, why would you get penalties if you've paid equal amounts quarterly and don't owe tax at the end of the year?
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Re: 9 personal allowances on W-4?

Post by moda0306 » Fri Aug 18, 2017 10:48 am

MangoMan wrote:
moda0306 wrote:I would have to respectfully disagree with Xan on estimates vs withholding. Withholding allows more year-end maximizing options without penalties for late payments. Payments don't let you bump all of it to the final two quarters without working that into your penalty calculation.
True, but as long as you avoid the penalty in the first place by paying in 100% of last year's liability, even if you pay it all in the 4th quarter, it becomes irrelevant.
I am pretty positive that this is incorrect. I will look into it further. Good discussion, though.
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Re: 9 personal allowances on W-4?

Post by Xan » Fri Aug 18, 2017 11:00 am

I'm pretty sure MangoMan is right. I've gone through that penalty formula. If you've paid enough by the January 15 deadline, then it's a no-op. It's a free loan from Uncle Sam.

I haven't used it myself: interest rates are low (certainly for instruments that I'd trust for absolutely needing the money next January), and I figure that in the event of any kind of audit or disagreement, it would be a demonstration of good faith (or at least, not a demonstration of bad faith) to more-or-less pay evenly through the year.

As far as withholding, I do pay quarterly instead of withholding. Being self-employed I have to. Haven't really ever done the W-4 thing, so I'm not entirely sure what's involved. I don't think I'd want to give up that kind of control of my finances.

PS, don't you have other side incomes which would mess up W-4 withholding assumptions anyway?
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