Tax question? - DPChallenge Forums

Nikon AF Nikkor 50mm f/1.8D

04/03/2006 11:17:15 AM · #1

My work has decided to pay us our vacation in one lump sum instead of on use. This is kind of cool in that I get a bunch of money all at once and I can buy some toys, BUT... Uncle Sam will tax this check at 40% which for 4 weeks is a lot of money gone before I see it. I just want to bring home a little more of this check than the 60% I'll get if I don't do anything.

So, a lot of my co-workers are telling me to temporarily change my W-4 to "exempt" and then changing it back in a week or so when we get our checks, but I'm afraid that will flag me for an audit next year. Another "cheat" I've heard is to claim up to 9 dependants so they take out much less in taxes, again, only for this check. They still take out some, but I'll have more in pocket. I'm not trying to cheat the government, as they will get their money in the long run, I'd just rather have more now in my pocket than wait a full year to get that part back in a return.

So, would temporarily filing exempt get me into trouble, or would claiming more dependants be the better option? Any help would be greatly appreciated. Thanks!

wavelength

Nikon D300

04/03/2006 11:23:50 AM · #2

People at my work who get regular performance bonuses (guess that's mee too now) always do this just before the bonus time. If you don't you'll most likely get it back from the tax man later, as your actual income will not have adjusted to the rate that they are taxing it at in this instance.

I recently got a cash award bonus of $300, since I didn't know it was coming, it was taxed down to $186. Brutal.

I have never heard of anyone getting flagged for audit for this, and I don't see why you would. The w-4 info is generally just for your HR group and payroll company to know how much to withold, I really don't think the IRS has time to keep track (fully) of every w4 change that everyone makes.

joebok

Fujifilm X100F

Nikon AF-S DX Zoom Nikkor 18-135mm f/3.5-5.6G IF-ED

04/03/2006 11:32:03 AM · #3

Either option is a transparent ploy - very easy to spot. Reading the text of the instructions, I would not try to claim exempt - it specifically outlines who can and cannot do that. Also where you have to sign it says "under penalty of perjury..."

(Here is the form)

Prof_Fate

04/03/2006 11:38:53 AM · #4

It's just a change on your W2 for your own internal payroll dept. call them, change it, and then change it back. no biggie.

04/03/2006 11:47:59 AM · #5

Originally posted by joebok:

Also where you have to sign it says "under penalty of perjury..."

(Here is the form)

Ya, I saw that and that's what got me worried. I wish they had an option to just take out the normal taxes instead of them getting greedy. I have no problem with paying what I'm supposed to pay, but when they reach further into your pocket when you get an "extra" check then that just bites.

TLL061

Canon EOS-5D Mark III

Nikon AF Zoom-Nikkor 24-85mm f2.8-4.0D

04/03/2006 11:49:20 AM · #6

Originally posted by Prof_Fate:

It's just a change on your W2 for your own internal payroll dept. call them, change it, and then change it back. no biggie.

I've done the same thing with a very large overtime check , works great as long as you payroll people don't mind

Message edited by author 2006-04-03 11:50:08.

Nikolai1024

Nikon D300

04/03/2006 11:53:58 AM · #7

That will only change taxes on your current check. It has nothing to do with total taxes you pay. When you file taxes at the end of the year all money you got will be added up and taxes will be calculated. If you "cheat" on your bonus check you will own money at the end of the year.

I say it is pointless to mess with that.

Nick

srdanz

Canon EOS-5D Mark IV

Canon EF-S 10-22mm f/3.5-4.5 USM

04/03/2006 12:01:58 PM · #8

W4 does not go to the IRS. It is up to you to decide how much to withold.
In the end, if you've witheld too little, IRS will slap you with the interest for underpayment. So, do what you want, but make sure that you do not end up owing too much. How much is too much - it is individual, and it also depends on your prior returns...

This is coming from a person whose only relation to IRS and taxes is paying them, so take it fwiw.

Spork99

OM System OM-1

Canon EF 100mm f/2.8 USM Macro

04/03/2006 12:23:34 PM · #9

My understanding is that most bonus payments are subject to a 25% deduction rate, regardless of the number of exemptions claimed.

timfythetoo

Apple iPhone 16 Pro Max

04/03/2006 12:32:14 PM · #10

I do my taxes every year using Taxcut. This year we got back way too much money. Taxcut (and other tax programs) have calculators that will help you figure out how much your withholdings should be according to your current paycheck so that at the end of the year you only owe a small amount or get back a small amount (I believe owing more than a 1000 gets you hit with interest). We bumped up our withholding number from 3 to 10 (the program said to hit it to 14 but we are playing it safe for now and will see what happens). The bonus we recieved this year wasn't figured into my calculations, but if you get the numbers closer with your annual pay with no extras you should belookin ggood at the end of the year.

wavelength

Nikon D300

Nikon AF Nikkor 50mm f/1.8D

04/03/2006 12:45:30 PM · #11

Originally posted by Spazmo99:

My understanding is that most bonus payments are subject to a 25% deduction rate, regardless of the number of exemptions claimed.

The guys here at work say they don't add exepmtions, they claim exempt for that period. The bonuses are all delivered on a specific date, so you can change your w4 on the intranet that monday, and then change it back as soon as you get your MIP.

It's not illegal at all, but yes, if you seem to always owe money anyways, leave your deductions as-is, and hope that you get it back in 12 months.

04/03/2006 01:05:58 PM · #12

Great responses everybody, thanks for the input. We always get a decent return as I claim "0" and have them take a little more out week to week, but 40% as opposed to 27% is quite a difference. I know they'll take it out of next year's return, but I'd rather have it now and use it towards some new gear.

Nikon AF Nikkor 50mm f/1.8D

04/03/2006 01:07:58 PM · #13

My score just dropped about .1, maybe the IRS is watching me as I type and are taxing my score too! :-) I'm not paranoid or anything.

David.C

04/03/2006 02:41:17 PM · #14

Take this for what you will, but my brother (a CPA) has this same problem with bonuses all the time. The problem comes from how the taxes are figured. Each pay period, the payroll department figures the total tax for the year based on what has already been paid plus an estimate of what will be made for the rest of the year. This estimate is where the bonuses and overtime checks cause problems, it is a very simple estimate made by taking the current pay amount and multiplying by the number of remaining pay periods. For bonus checks and overtime, this amount is so much more (hopefully) the amount of total tax is much higher. There is no special rate for extra payments, they just throw the calculations off for the entire year.

What he does, and suggested I do to take care of this is to file one W2 at the beginning of the year. On that W2 state that you wish to claim 100 dependants and an extra amount. The 100 dependants makes sure no tax is taken out based on the calculation mentioned above, while the extra amount pays the taxes. To figure the extra amount estimate your total yearly income (including bonuses), look on the tax chart (available from the IRS website), divide by total number of pay periods and look at the number that results. This is how much you need to have taken out each pay period to meet your tax obligation, if you want a little extra room to not have to pay in (or like round numbers, like me) add a bit more. This number goes in the extra amount space on the W2.

By doing the above, the statement about perjury doesn't matter -- you are still meeting your tax obligation, but have elected to make the calculations yourself. You are simply stating the estimates you made are valid tothe best of your knowledge.

The benefit of this is you get taxed the same amount every pay period and bonus check -- there is no need to continually file adjustment W2's every time you get an extra amount, it's all taken care of at the first of the year.

BTW: this can be done for state as well as federal. If your income changes often, and you feel your estimates might be a bit off, redo the calculations every quarter to make adjustments.

David