High paying job- W4 question

[Eyefixer]

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So, just got my first job that pays more than 250K. Married, wife in residency, first child on the way. They shoved a w4 form in front of me and I automatically put down 2 exemptions for both state and federal withholdings. I currently do not own property, so I do realize I'll be taxed up to ***. Should I change the exemptions to 0 or should I have them withhold more every paycheck?

On a different subject, the company also offers 401k and offers to withhold up to 18% from each check. Do people still recommend maximizing 401Ks with whats going on in the world nowdays?

Thanks for your opinions!

 

[Sol Rosenberg]

Do the worksheets on the W4 to figure out how many exemptions to claim. With a working spouse (even if she is in residency,) you might need to claim zero exemptions and have extra tax withheld if you want to avoid paying taxes at the end of the year.

Me, personally, I like to keep my $$$ as long as possible. I save(d -- while I was working before I had the crazy idea to go to medical school) a lot, so the potentially big tax bill at the end of the year was no big deal. You may end up paying penalties doing things this way, but I think my penalty one year was something like $100 on 6 figures of investment income on which I didn't pay estimated taxes (similar to not withholding enough.) But, if you want to "pay as you go," you can fill out the worksheets on the W-4 form (which will guide you on how to fill out the W-4 form itself.) If you do not completely understand what I am talking about (and the ramifications thereof,) or are uncomfortable with it, I woulds suggest talking to an accountant.

Personally, I think now is a great time to put $$$ into the market (buy low,) if you have the cash, but I don't claim to know the future. Don't gamble more than you can afford to lose. Nevertheless, you could still realize the tax benefits of a 401k by contributing the max (even though they can take up to 18% per paycheck, you cannot contribute more than 16.5k per person per year to your 401k -- your employer will likely cut you off if you hit that limit, but be careful because it is hard to get that money back if they over-withhold for your 401k) even if you invest your 401k into something less risky like bonds or even a money market account, if you are risk-averse. One other bit of advice about 401ks, if your wife's contributions are not percentage limited, you can have her contribute up to 16.5k per year as well. That would be a significant fraction of her stipend, but so what -- you'll just live off of your income. That would reduce your AGI by 33k, putting you well under the "now screwed by Obama" 250k+ amount.

Anyways, I ended up babbling more than I thought I would. Hopefully you'll be able to get something out of my ramblings...

 

[Eyefixer]

So, if I leave the 2 exemptions the worst thing that happens I pay more at the end of the year? And good suggestion about my wife maximizing her 401K; will definitely do that.

Do the worksheets on the W4 to figure out how many exemptions to claim. With a working spouse (even if she is in residency,) you might need to claim zero exemptions and have extra tax withheld if you want to avoid paying taxes at the end of the year.

Me, personally, I like to keep my $$$ as long as possible. I save(d -- while I was working before I had the crazy idea to go to medical school) a lot, so the potentially big tax bill at the end of the year was no big deal. You may end up paying penalties doing things this way, but I think my penalty one year was something like $100 on 6 figures of investment income on which I didn't pay estimated taxes (similar to not withholding enough.) But, if you want to "pay as you go," you can fill out the worksheets on the W-4 form (which will guide you on how to fill out the W-4 form itself.) If you do not completely understand what I am talking about (and the ramifications thereof,) or are uncomfortable with it, I woulds suggest talking to an accountant.

Personally, I think now is a great time to put $$$ into the market (buy low,) if you have the cash, but I don't claim to know the future. Don't gamble more than you can afford to lose. Nevertheless, you could still realize the tax benefits of a 401k by contributing the max (even though they can take up to 18% per paycheck, you cannot contribute more than 16.5k per person per year to your 401k -- your employer will likely cut you off if you hit that limit, but be careful because it is hard to get that money back if they over-withhold for your 401k) even if you invest your 401k into something less risky like bonds or even a money market account, if you are risk-averse. One other bit of advice about 401ks, if your wife's contributions are not percentage limited, you can have her contribute up to 16.5k per year as well. That would be a significant fraction of her stipend, but so what -- you'll just live off of your income. That would reduce your AGI by 33k, putting you well under the "now screwed by Obama" 250k+ amount.

Anyways, I ended up babbling more than I thought I would. Hopefully you'll be able to get something out of my ramblings...

 

[Sol Rosenberg]

So, if I leave the 2 exemptions the worst thing that happens I pay more at the end of the year? And good suggestion about my wife maximizing her 401K; will definitely do that.

The worst that happens if you don't withhold 90% of your total tax due (or 110% of your total tax from last year) is that you pay a penalty (in addition to having to pay what you didn't have withheld, of course.) The computation of the penalty is complex.

On second thought, it's probably just better to get it all correct. Here is an online version of the W-4 worksheet. Just fill it out, and it will tell you how to fill out the W-4:

http://www.irs.gov/individuals/article/0,,id=96196,00.html

 

[schwab]

The worst that happens if you don't withhold 90% of your total tax due (or 110% of your total tax from last year) is that you pay a penalty (in addition to having to pay what you didn't have withheld, of course.) The computation of the penalty is complex.

On second thought, it's probably just better to get it all correct. Here is an online version of the W-4 worksheet. Just fill it out, and it will tell you how to fill out the W-4:

http://www.irs.gov/individuals/article/0,,id=96196,00.html

Definitely use that calculator, it's very helpful. I did a blog post a while ago about why you should only have the taxable amount you think you'll have to pay withheld followed by a post about how to make sure you only have that amount withheld from your check - pretty much just using the above calculator.

To use the IRS's calculator, though, you'll need to figure out how much you'll have in deductions and credits to get a more accurate estimate. Deductions include things like moving expenses, tuition, etc. Credits are available for kids and other such things. Do a little research because the calculator, as with most things, gives better output with you give it better input.

As for the 401(k), I'd definitely contribute - especially if there's a company match. You're now a high income earner, so reducing your taxable income as much as possible is very important because you'll be taxed 33% on each of those dollars that you don't contribute to the 401(k) (which means you're really only paying 66 cents for each dollar to contribute.. crazy when you think about things different ways!) You're allowed to contribute a maximum of $16,500 for 2009 - so make sure you don't go over that amount.

If you go for the 401k - make sure to deduct that when you're using the IRS withholding calculator as well.

 

[Eyefixer]

Thank you. This is very informative. I did the calculations and my suggested allowance came is at 20. Can this be correct? I always thougt that the more allowances you put down on W4, the less tax is taken out of each paycheck?!

 

[Sol Rosenberg]

Thank you. This is very informative. I did the calculations and my suggested allowance came is at 20. Can this be correct? I always thougt that the more allowances you put down on W4, the less tax is taken out of each paycheck?!

Yeah, sounds like you did something wrong. I have kids, credits, lots of deductions, and I don't have that many allowances.

 

[nontrdgsbuiucmd]

Yep, you should be at zero allowances + extra taxes paid; that's what the calc w/2 kids & 120K income came out to; with your income I'd expect even less exemptions; suggest you look at the form again.

Sol had some dang good advice in the posts above, suggest you confirm you understand all the points raised.

Only other thoughts would be to see if you've got a flexible spending account available -- many employers offer these, the idea is you withhold $$ which go directly into this account (for example many employers allow you to contribute up to 5K healthcare, 5K childcare per year). If these are offered through your employer, you'd decide @ beginning of year how much to contribute, this amount is deducted from your monthly/semimonthly pay on a PRETAX BASIS, and then you can use this $$ for certain things, like the $$ in the medical flex spending account can pay med deductibles, prescriptions, copays, etc. The reason for doing this is you would not pay social security tax, federal tax,state tax etc on any $$ funneled through this account.