No overtime taxes.

[justoffal]

This is not quite correct.

IRS Publicatgion 15-T provides the instructions for calculation of Federal withholding.

While it is true that the pay period compensation is forcast to an annual amount (called the Annual Adjusted Wage Amount or AAWA), that figure is based on the pay cycle not the week. Pay cycles are typically Monthly, Semi Weekly, Bimonthly, and Weekly (although it can be a Daily cycle that is pretty rare). Secondly, that Annual Adjust Wage Amount is only used for that pay cycle for when wages/salaries are earned. The AAWA is cycle dependent and is recalculated for each payroll period.

The system's do this dynamically just to prevent the kind of "distortion" you suggest in your post. It implies if that 80 work week occured in the first week in January, the that tax bracket (rate) determination would apply for the full year causing what you call the "distortion". That isn't the case, the AAWA projection applies only to that pay cycle.

WW

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www.irs.gov

Yes that's exactly what I mean...one week gets the higher rate and the next regular paycheck corrects. Most folks don't understand that everything evens out in the refund.

 

[hadit]

Yes that's exactly what I mean...one week gets the higher rate and the next regular paycheck corrects. Most folks don't understand that everything evens out in the refund.

In the meantime, the government gets to hold onto what I've earned for up to a year, only to give it back to me as payment for a no-interest loan.

 

[Concerned American]

Yes that's exactly what I mean...one week gets the higher rate and the next regular paycheck corrects. Most folks don't understand that everything evens out in the refund.

For years, I had more than Single, no dependents deduction from my pay because I didn't want to pay at the end of the year. Many people complain that is giving the gov't a free loan but the peace of mind of not having to sweat the taxes was worth it to me.

 

[WorldWatcher]

For years, I had more than Single, no dependents deduction from my pay because I didn't want to pay at the end of the year. Many people complain that is giving the gov't a free loan but the peace of mind of not having to sweat the taxes was worth it to me.

I’m on board with that. But we like owing a little bit.

What we do is manage our taxes so we are at the end of the year owing a small amount. This year we hit owing $300.

There is then a window between January and April where you can make an IRA contribution and apply it to the previous tax year for your return.

This year a few thousand from our “House Fund” over projected needs was moved dropping the total owed to $89. Which was pretty good.

WW

 

[Concerned American]

There is then a window between January and April where you can make an IRA contribution

LOL, if only. I've reached the age where they're forcing me to take minimum distributions from my retirement accounts.

 

[WorldWatcher]

LOL, if only. I've reached the age where they're forcing me to take minimum distributions from my retirement accounts.

Ya, your boned. LOL.

Seriously, and get professional advice, don't take my word as a rando Internet poster.

Look into what I call "Income Bracketing".

Let's say - just as an example - you are Single and in December you do a rough out on your taxes and have $150,000 AGI. That is the 24% tax bracket. It can make sense to take additional money out of your Deferred Compensation accounts and pay the taxes now instead of just taking the required RMD. This is because the next bracket (32%) doesn't kick in until around an AGI of $197,000. It's a way of lowering tax deferred assets now to not get hit with a higher bracket (rate) later.

Now if you are in the 24% bracket and have an AGI of say $190,000, you really don't have a lot of room before the next bracket kicks.

You can use the revenue to invest in similar non-tax deferred accounts and only pay income taxes on the dividends, or pay down the house, or setup a college fund for the grand kids, or over time "gift" money to the kids.

I'd advise - if you already aren't - investigate the rules for what happens to your 401K when you pass. They are significantly different if you have a spouse verses having "beneficiaries".

WW