Stimulating Taxes

[kevin_standlee]

I got a note from my company's HR department advising us of changes in tax withholding on account of the stimulus package from the federal government. Following their instructions and going to the web site they directed, I determined that if I did not do something, I'd end up owing between $500 and $1000 in income taxes next April. Besides not wanting to have to come up with the money then, I thought there was a penalty for under-payment. So I had to refile my W-4 withholding exemptions form, and after all the changes percolated through, I end up with about $2/week more in take-home pay. Oh, well, at least my net pay didn't go down.

Comments

[kevin-standlee.livejournal.com]

Oh, the joys of self-employment. I've dealt with it at one remove for a friend who is a self-employed artist and whose taxes I did for several years.

Although I've taken great pains to keep my refunds small, I'd rather have a $400 refund than have to pay $400, even though it means the government kept my money interest free for up to a year.

[gil-liant.livejournal.com]

As you note: from a purely pragmatic viewpoint it is better to make a payment at the end of the year, rather than get a refund. But, for a variety of personal reasons, many people prefer to arrange things so that they get a refund instead. More power to them.

But I am puzzled by what I understand to be a math mystery contained in your original post: If you adjusted your withholding so that more tax is withheld during the year (i.e., so you will get a refund, rather than having to make a payment), how is it possible for your take-home pay to go up? (Unless you got a raise or something and didn't mention that as a contributing factor.) The equations seem simple to me (for a constant Income):

Tax Withheld Now + Tax Paid At End Of Year = Total Tax (a function of Income)
Taw Withheld Now + Takehome Pay = Income

To reduce Tax Paid At End Of Year, Tax Withheld Now must go up (because Total Tax is constant if Income is constant). If Tax Withheld Now increases, Takehome Pay must decrease. Any other result is suspect, unless your Income was not held constant during the exercise.

Of course, if you got a raise, then what happened (most likely) is that your take home pay went up less than it would have if you hadn't adjusted your withholding.

[kevin-standlee.livejournal.com]

What happened was that the Government changed the withholding tables to withhold less pay from people's paychecks; however, depending on how much on makes and one's specific tax situation, this can lead to one having insufficient tax withheld. Before I did any adjustment, my paycheck did go up a bit -- not as part of any raise, but simply because less tax was withheld. After doing the calculation and refiling my W-4, the net pay went back down, although it was still slightly more than what I'd been taking home before.