Jul 02 2008

Estimating your tax obligation for the year

Can you believe we’re already half way through 2008? I can’t.

I’m looking at our income for 2008 so far to anticipate what our tax obligation will be for the year. Shane’s income is steady, but my income is sporadic. Oh, it’s going to be fun figuring our taxes on those things. Tons of fun.

We won’t be able to completely nail down an estimate on our taxes, because my baby’s due date is December 30. If he or she is born in 2008, we’ll be able to claim Baby on our taxes for the year. That would mean a nice refund of $1,700 or so! But, if we don’t get to claim Baby for the 2008 tax year, we’ll just get to keep claiming him or her until 2026, instead of 2025. It’ll work out somehow.

It’s entirely possible that my baby will wait until 2009 to make an appearance. We can all make guesses later.

Even with all of these unknown factors, it’s still worth making sure we’re not withholding too much taxes from Shane’s paycheck.

I ran the numbers on the IRS Withholding Calculator, and if my estimates hold true, we will get a federal refund of about $200. I’d like a small refund like this. A large one would mean we’re sending too much to the government right now.

Crunch some numbers and see what happens. If you’re looking at a substantial refund, consider adjusting your withholding so you get more money in your take-home pay. And if you find out you’ll be owing a nice chunka change next year, it might be worth adjusting that or setting aside some money to cover your tax liability.



13 Responses to “Estimating your tax obligation for the year”

  1. We didn’t figure our tax withholding right last year and ended up owing money, which was disappointing. When my husband started a new job this year, he tried to figure it out correctly, so we’ll see what happens this year!

  2. Owing a small amount of money next April is actually a good thing, and should be your goal. (That is if you can plan for it and keep the money and not spend it).

    I has always found that any of the planning calculators are lousy, and I’ve always been too overwithheld when I’ve used them (say on the order of $1000+)

    So what I started doing was actually look at the rules for withholding, and based my withholding on that. The rules specify that if your withholding for tax year 2008 is at least as much as your actual tax year 2007 taxes, then there will be no penalties, regardless of how much your taxes actually came out to be. I’ve been doing this for about 4 years and it works well, including a year when I got laid off and had a very large severance package.

    So when my taxes were figured out for 2007, I then went and adjusted my withholding for the rest of the year. There’s some math involved, but if you can calculate your CVS ECB savings and put together those shopping trips, you can do this.

    Take your last paycheck and look at how much has been withheld so far. Let’s say that value is $1000. Then count how many paychecks you’ve still got coming for 2008. Right about now, that number is probably 13 if you’re paid every other week. Then go back and look at your tax bill for 2007. Let’s say it was $1900.

    Your goal is to have $1901 withheld for 2008. You’ve already had $1000 withheld, so in those remaining 13 paychecks, you need $901 withheld, which is just under $70/paycheck.

    Then get a W-4 form and set your exemptions to 99. Then in the “extra withholding” field, put in $35. Note that this field is the amount to be withheld per *week*, not per paycheck ($70 divided by 2).

    Then check your next paycheck and verify that the correct amount was withheld and that you did your calculations right. Later in the year, you probably should check it again.

    For a couple years, I tried to do this by getting the exemptions set correctly, but that’s really complicated and this simple method works just as well.

    Now, if you think your taxes will actually be $2000 due to a raise or other income, then take that $100 and put it aside so you have it next April.

  3. We claim two babies this next tax season, so that will be a nice chunk of change. Were hoping to even out. We rather even out then anything else in the long run.

    Thank you Scott for that information, we’ll have to try and put something like that to effect with our taxes.

  4. Thank you for the heads up on the adsense terms and conditions as well as the info. regarding blogher and blogads.

    Like you said blogher is not accepting new blogs ut will notify me when they are and blogads states that I need a referral.

    I am so new to blog advertising and am having a great time learning about the posiibilities. My husband was so concerned when I made the decision to include ads on my site. He asked if my readership might decrease (not that I have a big fan base or anything).

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    Either way I am not planning on giving up blogging anytime soon.

    Any, words of wisdom are welcome Kacie. I admire all that you are doing with your blog. You are helping so many people think differently about the way that they handle their finances.

    Hadias’s last blog post..Bulk Shopping

  5. I desperately need to take a look at this because my husband started his own business in March and things were hopping for a few months but now it’s slowed way down. The really annoying thing about all this is my employer doesn’t show the total amount I’ve paid into taxes for the year, only the monthly amount. And I’ve changed my withholding a couple of times already. Thankfully since I work closely with our company accountant I can access the payroll information and gather it easily enough. Thanks to Scott for the information shared in the second comment. BTW, if you want to take some of the guesswork out of how much your employer will be taking just go to http://www.irs.gov and download Circular E Employers Tax Guide, aka Publication 15. Toward the back of the guide there will be Income Tax Withholding tables. Just find the section that matches you – if you claim single, are paid weekly, your wages are at least $530 but less than $540 and you claim two withholding allowances, then your employer should be taking $45 from your check for Federal Withholding taxes. This way you can play around with the allowances, or can even call yourself single if you are married so they’ll take more money out if you need them to. HTH.

  6. Thanks for the tips, Scott!

  7. Mrs. Accountability: I used to do it that way, but the difficulty is that you don’t put your gross wages into the table as input, but the wages after you’ve deducted the withholding exception amount (the # of exemptions times the deduction per exeption). Since what you’re trying to calculate is that number of exeptions, it’s a messy calculation and will likely involve trial an error, especially if you have a lot of expected deductions (charitable contributions, mortgage interest, …) which will likely alter your bracket.

    By just putting 99 in for the number of exemptions, you’ll reduce the amount of withholding based on the withholding tables to zero. And then you can simply specify exactly how much you want withheld directly.

  8. What a wonderful idea!!! I may just do that for my paycheck W4. I loathe the idea of ‘lending’ money to the government so owing money is just fine to me. It means that I can leave my money in the bank and earn interest all year instead of letting the government use it. :)

    It cracks me up that my coworkers get all excited about “free” money back to them…some get $4,000!!! And that’s with no kids. They’re clearly doing something wrong because that’s $4,000 that could be invested all year. Sheesh.

    castocreations’s last blog post..Never Trust Your E-Mail

  9. This is a super idea for people who are good with money, like you obviously are! It’s kind of nice for us to “loan” our money to the government and get a big return because we make better use of a big chunk than we do an extra few dollars per month. Not that it matters for us anyway as we are self-employed and pay all of our taxes at once. ;-)

  10. i should probably do this since we got sideswiped by the fact that we OWED $1300 to federal this past tax season. didn’t see that coming… so, that’s where our stimulus check went to, along with a few payments to cover the rest of what we owed as well as some for interest because we couldn’t pay it all up front. (i lost my job in march, making it out of the question to take $1300 out of our savings to pay for our taxes and save on the penalties) *sigh*

    tiffanie’s last blog post..nothing like a free $25

  11. My husband has done this and it’s proved fairly accurate–knock on wood :)

    Michelle at Scribbit’s last blog post..Nail Driving Contests

  12. Paulette- You’ll need your most recent pay stub (hopefully it’ll have the amount of tax you’ve paid for the year, as well as the individual pay period). Input some of those numbers into that calculator on the IRS site.

    Hope that helps!

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Hey! I'm Kacie, wife to Shane and mother to Jonathan (7), Vivienne (5) and Amelia (2) . I write about my family's finance: how we save money, improve our spending, and plan for the future.

I hope I can inspire and encourage you to improve your situation. See disclosure.

I'm adopting a much slower-paced posting schedule, and treating this as a hobby blog now.

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