Tax question

[cychosis]

Is this legal?

I'm thinking about withholding a bunch of money from my paycheck for the first 9-10 months out of the year (3 down already), gaining interest on it, and then dumping almost my entire paycheck into taxes in November and December to avoid an underpayment penalty.

[MNclone]

you dont have to take any taxes out of your paycheck. it just means that you have a lot to pay in come March.

[CycloneYoda]

Interest gained counts as capital gain, and it wii also be taxed.

[CLONECONES]

you dont have to take any taxes out of your paycheck. it just means that you have a lot to pay in come March.

or April

[IcSyU]

Is this legal?

I'm thinking about withholding a bunch of money from my paycheck for the first 9-10 months out of the year (3 down already), gaining interest on it, and then dumping almost my entire paycheck into taxes in November and December to avoid an underpayment penalty.

You wouldn't want to withhold much in the first ten months. That would defeat the purpose of your plan.

And unless you make a ton of money there won't be an underpayment penalty.

As an accountant I'd tell you this is probably a bad idea. What happens if you lose your job in August and spend the rest of the year unemployed? Now you have to come up with your entire tax liability.

[VeloClone]

You'd better do some reading up on this before doing anything rash.

The United States income tax is a pay-as-you-go tax, which means that tax must be paid as you earn or receive your income during the year. You can either do this through withholding or by making estimated tax payments. If you do not pay your tax through withholding, or do not pay enough tax that way, you might also have to pay estimated taxes. If you did not pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax. Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller.

Tax Topics - Topic 306 Penalty for Underpayment of Estimated Tax

[CyPride]

Interest gained counts as capital gain, and it wii also be taxed.

interest earned on money is taxed as ordinary income, not capital gains. interest income does not have fica/med taken out, however.

[cychosis]

you dont have to take any taxes out of your paycheck. it just means that you have a lot to pay in come March.

Thanks for replying.

I thought you get a penalty if you owe more than 10% (come April) of the total amount you are supposed to contribute throughout the year. If that's not the case, I'd rather just pay a gigantic lump sum in March every year.

Publication 505 (01/2012), Tax Withholding and Estimated Tax

[CycloneYoda]

interest earned on money is taxed as ordinary income, not capital gains. interest income does not have fica/med taken out, however.

I see. Despite the mistake, no way around the taxman.

[cychosis]

And unless you make a ton of money there won't be an underpayment penalty.

How much is a ton for married filing jointly?

As an accountant I'd tell you this is probably a bad idea. What happens if you lose your job in August and spend the rest of the year unemployed? Now you have to come up with your entire tax liability.

Good point about the layoff thing. I might do this in shorter spurts (quarterly, semi-annually).

[Incyte]

What's your account rate? You'd save more money skipping going out to lunch once a week.

[IcSyU]

How much is a ton for married filing jointly?

Good point about the layoff thing. I might do this in shorter spurts (quarterly, semi-annually).

I don't have an amount for you off the top of my head but keep in mind that an underpayment penalty is a possibility. On top of that, do you have enough liquidity to absorb a potential problem in the event you lose your job and/or the water heater goes out, the car needs fixed, the house needs work done, etc.

Next year when you do your taxes, get quarterly estimates prepared and it'll accomplish what you're trying to do.

[cychosis]

You'd better do some reading up on this before doing anything rash.

The United States income tax is a pay-as-you-go tax, which means that tax must be paid as you earn or receive your income during the year. You can either do this through withholding or by making estimated tax payments. If you do not pay your tax through withholding, or do not pay enough tax that way, you might also have to pay estimated taxes. If you did not pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax. Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller.

Tax Topics - Topic 306 Penalty for Underpayment of Estimated Tax

Since my wife and I both worked a partial years in 2011 our taxes for 2011 will be several thousand lower than 2012. With the wording above, I only need to make sure I pay the total I had for 2011 in 2012 to avoid the penalty correct? Then pay a lump sum in April for the remainder.

Thanks for the free tax advice guys. Rep all around!

[IcSyU]

Since my wife and I both worked a partial years in 2011 our taxes for 2011 will be several thousand lower than 2012. With the wording above, I only need to make sure I pay the total I had for 2011 in 2012 to avoid the penalty correct? Then pay a lump sum in April for the remainder.

Thanks for the free tax advice guys. Rep all around!

You missed the key word in the above. You want to see the "generally" part. The IRS is going to milk you for everything they can if they get a chance as they're hurting for money. If they think something is fishy, you're going to get hit with an underpayment penalty.

[cychosis]

What's your account rate? You'd save more money skipping going out to lunch once a week.

I know, but it's the principal of the whole thing. I'd rather get the interest on my money than have the feds get the interest.