Tuesday, December 21, 2010

Tax Changes

As I mentioned before, I am eligible for EIC. Which essentially means, I don't pay federal income tax, when all is said and done. But with the phase out of Advance EIC in the paycheck, how can I make sure no federal income tax gets withheld?
The new tax bill just passed and early release percentage tables are available on the IRS website.

So how to figure this up? Two first questions:
What is your pay period,
What is your taxable pay,
and What is your filing status?

I get paid bi-weekly, and my taxable pay is typically 925. However, I purchased cheaper health insurance, and sometimes I get a little overtime, so I am going to bump this figure to 1075. I will be filing married.

Look at the percentage table, for a married filer being paid bi-weekly, withholding doesn't kick in until my post-allowance taxable wages reach $304. The trick is to get your post-allowance taxable wages under the threshold that applies to you.

As a married filer, I also notice that each withholding allowance is worth $142.31. Now let do the math:

$1075 taxable pay - $304 withholding threshold = $771 dollars that I need to reduce by claiming withholding allowances. More math:

$771 / $142.31 = 5.41. So I need to claim 6 allowances to avoid withholding up to at least $1075.

DISCLAIMER & WARNING: I am not a tax lawyer or professional. This advice is intended to help those of you whose tax situation results in -zero- tax liability at the end of the year. Please review your past returns and current pay stubs and consider other sources of income when making a final decision on allowances you claim. If you underpay your taxes you could be hit with significant fines and penalties.

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