MeFi Tax-Man
February 2, 2010 10:02 AM Subscribe
[TaxFilter]: I will only be working half of 2010 and want to adjust my Federal and State/City (NYC) withholding appropriately. Help!
YANMAccountant, YANMLawyer, YANM*
Pertinent Facts:
*I live and work in NYC and pay NY State/NYC income taxes
*I am single and claim 2 exemptions on my W-4
*I make about $40,000 in salaried income
*I plan on working only 1/2 of the year and then going to business school
*I estimate $21,000 in salary this year, give or take $1,000
*I plan on deducting the max $5,000 from contributions to a Traditional IRA
*I also plan on taking the full $4,000 tuition deduction
$21,000
-$5,000
-$4,000
-$5,700 standard deduction
-$3,650 personal exemption
-some student loan interest deduction
= <>10% of $2,500 = $250 federal income tax
4% of $2,500 = $100 NYS income tax
2.55%[pdf] of $2,500 = $64 NYC income tax
If these calculations are right, I've already paid all the tax I'll need to pay for 2010. Can I mark "exempt from income tax" on a revised W4 to my employer? Or should I just claim a large number of exemptions? 5? 10? More? Please tell me if I'm missing something obvious in this calculation, or marking 10 exemptions is a baaaad idea, or if there's a "right" way to go about getting the proper amount withheld.
(I know there is a "partial year" withholding method, but I don't want to discuss with my employer my plans to leave in July. Also the reason for the anonymous/ninja post.)
¡BONUS QUESTION!
A CPA friend recommended the IRA. The gist: contribute $5,000 tax deductible in 2010. Then in 2011, when I am still a student and still making about $0, convert to Roth IRA and pay very little income tax (~10%). Basically socking away $5,000 at a much lower tax bracket than I could otherwise achieve. Seems sensible to me, and all the documentation I can find agrees, but is there something I'm missing?
Pertinent Facts:
*I live and work in NYC and pay NY State/NYC income taxes
*I am single and claim 2 exemptions on my W-4
*I make about $40,000 in salaried income
*I plan on working only 1/2 of the year and then going to business school
*I estimate $21,000 in salary this year, give or take $1,000
*I plan on deducting the max $5,000 from contributions to a Traditional IRA
*I also plan on taking the full $4,000 tuition deduction
$21,000
-$5,000
-$4,000
-$5,700 standard deduction
-$3,650 personal exemption
-some student loan interest deduction
= <>10% of $2,500 = $250 federal income tax
4% of $2,500 = $100 NYS income tax
2.55%[pdf] of $2,500 = $64 NYC income tax
If these calculations are right, I've already paid all the tax I'll need to pay for 2010. Can I mark "exempt from income tax" on a revised W4 to my employer? Or should I just claim a large number of exemptions? 5? 10? More? Please tell me if I'm missing something obvious in this calculation, or marking 10 exemptions is a baaaad idea, or if there's a "right" way to go about getting the proper amount withheld.
(I know there is a "partial year" withholding method, but I don't want to discuss with my employer my plans to leave in July. Also the reason for the anonymous/ninja post.)
¡BONUS QUESTION!
A CPA friend recommended the IRA. The gist: contribute $5,000 tax deductible in 2010. Then in 2011, when I am still a student and still making about $0, convert to Roth IRA and pay very little income tax (~10%). Basically socking away $5,000 at a much lower tax bracket than I could otherwise achieve. Seems sensible to me, and all the documentation I can find agrees, but is there something I'm missing?
IANAA.
My understanding is that while it is *not* legal for you to claim exempt status, it *is* legal to crank your withholding exemptions up to a really high number (I was told 7) in order to have a very small or zero withholding, if that gets you to the correct withholding for the year, starting now.
As for playing around with IRAs and such, *definitely* get a second opinion from another CPA/tax adviser. Basically, what you're describing sounds a bit too good to be true to me, but I don't know enough to describe why - I'm going on intuition, and I could well be wrong.
posted by Citrus at 12:44 PM on February 2, 2010
My understanding is that while it is *not* legal for you to claim exempt status, it *is* legal to crank your withholding exemptions up to a really high number (I was told 7) in order to have a very small or zero withholding, if that gets you to the correct withholding for the year, starting now.
As for playing around with IRAs and such, *definitely* get a second opinion from another CPA/tax adviser. Basically, what you're describing sounds a bit too good to be true to me, but I don't know enough to describe why - I'm going on intuition, and I could well be wrong.
posted by Citrus at 12:44 PM on February 2, 2010
Plug your details into the calculator here to check out the Trad to Roth conversion
posted by IanMorr at 1:50 PM on February 2, 2010
posted by IanMorr at 1:50 PM on February 2, 2010
This thread is closed to new comments.
Don't worry about claiming a bunch of exemptions. The IRS doesn't actually care how many you claim as long as you don't go to far over or under the amount of taxes you're going to owe come Apr. 15. When I started my new job last August, I claimed 14 exemptions. Then in late December I filled out a new W-4 claiming only three exemptions. I hit my 2009 taxes on the nose. Total refund of less than $100.
I wouldn't mark "exempt" though. True, it doesn't look like you'll be paying much in taxes, but there's a difference between "little" and "zero" which can be significant. Also, you never know what's going to happen this fall. Plans are awesome, but they change.
In re: IRAs. A Roth may be your best bet anyways. Traditional IRAs you pay taxes later. Roth IRAs you pay taxes now. The one you want to use is the one where you pay taxes when you're in a low bracket. Right now you're in the lowest one--maybe not even paying income tax at all--so Roth is probably the way to go, but you'll have to crunch your own numbers.
Ultimately though, I'd consider using tax planning software to get this done, if not actually going to an expert.
posted by valkyryn at 10:43 AM on February 2, 2010