How to minimize over-withholding of taxes

Question

I want to lower the amount of taxes I pay in a year. Currently I claim 1 federal and IL allowances Additional amounts deducted for FED and State (ILLINOIS): $0.00.

I'm single and don't have any children

I rent

I don't pay local/city tax

I'm in the 25% marginal tax bracket

My state tax is 3.25%

Here is the break down of how much I'm paying, which I think is too high, and would rather have more money to invest into my Roth, save for emergency fund, etc.

Gross Earnings: $2,230.76

All insurance payments are taken out pre-tax bi-weekly. $133.45

Fed Taxable Gross: $2,101.28

Total taxes: $543.61

Total Deductions: $133.64

Total Deductions include the following:

 Before Tax Deductions:              After Tax: 
        401k    $66.92                  LTD $2.46
        Med     $45.77
        Dental  $6.66
        Vision  $5.83
        Life    $4.72
        Grp ADD $1.28

Reducing the amount refunded to me at the end of the year is my goal, which I want done by reducing the amount withheld from each check (ideally ~$0.00 as close as I can get). Is filing 0 really the solution to this? I'm not sure how to calculate my tax check afterwards.

Right now I'm paying 543.61*26 = $14,133.86 in taxes a year. Does paying this much/year in taxes seem steep?

Here's what I figure I'll owe.

$58,000-$6,300(Standard Deduction) = $51,700.

$51,700 - $37,650 (up to 15% marginal tax rate) = $14,050

$14,050 * .25 (Federal Marginal Tax Rate) = $3,512.50

$3,512.50 + $5,183.75 (amount owed from $0-$36,751) = $8,696.25

$58,000 * .0375 (IL Income tax = 3.75) = $2,175

$8,696.25 + $2,175 = $10,871.25 Taxes owed (Federal and State)

$14,133.86 (taxes paid) - $10,871.25 (taxes owed) = $3,262.61 Refund

FED withholding : $302.10 
FED MED/EE: $31.43 
FED OASDI/EE:$134.42 
IL Withholding: $75.66 

This is simplified and doesn't take into consideration that I will be paying student loan interest, which will increase my tax refund.

Answer 1

So after a great deal of clarification, it appears that your question is how to adjust your withholding such that you'll have neither a refund, or a balance due, when you do your 2016 taxes next year.

First, a little terminology. The more you have withheld, the more money will be taken out of your check to cover your estimated tax liability. Confusingly, the more allowances you select on your W-4, the less money you will have withheld (more allowances means more dependents/deductions/other reasons why you will owe less tax). When you go to file your 2015 tax return next year, you'll figure out exactly how much you owe. If you had too little tax withheld, you'll have to pay the difference. If you had too much tax withheld, you'll get a refund back.

Given your situation, simply following the instructions on the W-4 should work pretty well. If you want to be more precise, you can use the IRS Withholding Calculator to figure the number of allowances and submit a new W-4 to your employer.

It's a little hard to tell whether "paying this much/year in taxes seem steep?" because you've lumped all the taxes together in one big bucket. Does the $543.61 in taxes per paycheck include Social Security (OASDI) and Medicare taxes?

Whatever you do, it's not going to be an exact science. Come tax time, you'll figure out exactly what you owe and either pay the balance or get a refund back. As long as you're relatively close, that's fine. You can always adjust your withholding again next year after you've done your taxes.

Answer 2

Here is the way I would estimate your taxes. Remember that a bi-weekly paycheck means that you get 26 paychecks per year.

$58,000 gross
    FICA tax: $4312, or $165.85 per paycheck
- $3411 before tax deductions ($131.18 per paycheck)
$54,589 adjusted gross income
- $6300 standard deduction
- $4050 personal exemption
$44,239 taxable income

25% tax bracket: $5183.75 + 25% of the amount over $37,650
$6831 total federal tax

$7855 federal tax withheld ($302.10 per paycheck)
$1024 federal tax refund



Illinois:
$54,589 adjusted gross income
- $2150 Illinois personal exemption
$52,439 Illinois taxable income

3.75% Illinois flat tax
$1966 total Illinois tax

$1967 Illinois tax withheld ($75.66 per paycheck)
$1 Illinois tax refund  :)

If the $1000 federal refund is too much for you, you can decrease your withholding to bring your refund down. This can be done by increasing your exemptions claimed on your W-4. See "How can I adjust tax withholding so that I don't get a large Tax Refund?" for more details.

However, keep in mind that your state withholding is perfect right now, and if you increase your exemptions, you will likely owe tax to the state, unless you increase your state withholding at the same time.

Answer 3

Look at how much tax you paid last year, including withholding and any additional amount that might have been due with the tax return. Look at the instructions for the W-4 form, which sets how much tax you want your employer to withhold. Adjust the numbers on that form until the total withheld during the year is close to what you expect this year's total to be -- remember, though, that there's no penalty for over-withholding but could be for under-withholding. Submit the W-4 form to your employer.

Remember that we're a few weeks into the year, so even if you adjust withholding now there will have been several paychecks at the prior setting; you can try to build that into your guesstimate of how to reset the withholding, or just not worry about it.

Do the same with your state's withholding adjustments form.

Repeat on a yearly basis, to account for raises, changes in other income, changes in filing status, etc. until it's close enough that you're satisfied with it. Then reconsider if/when your financial situation changes.

Personally I find that exercise more effort than it's worth, and have simply set my withholding at "close enough". I usually get some money back from the feds and owe some to the state, but either is handled happily by my normal bank account balance.

Answer 4

Welcome to the real world :-) There really aren't all that many ways for ordinary employees to lower taxes. You could put more in your 401k, buy a house (for the mortgage interest deduction, which lets you deduct some other things instead of taking standard deduction), or move to a different state to get rid of the state tax.