Why doesn't the IRS let you claim EXEMPT on your W4 so that you can pay taxes at the end?

Question

Instead of paying per payheck, you could take the money out of your paycheck yourself and then put the money in an interest bearing account. When it comes time to pay, you just pay out of that account on April 15. At least you'd have made interest on the money instead of having the IRS take it out each paycheck. For some reason, the IRS forbids this. Wouldn't it be better to let us invest the money instead of giving the Gov't an interest free loan?

Answer 1

I see your point on this. There is (kind of) a solution to your suggestion. What you could do is claim a really high number of exemptions on your W-4 at the beginning of the year, thus increasing your take home pay. Then, take that money, let it earn interest for awhile. The next part is the hard part: at the beginning of the 4th quarter of the tax year (October 1), review your tax liability. This is basically like calculating your tax return 3 months early. See what your projected liability is for the year, then use the last 3 months of the year to catch up on your withholding. As long as you have enough withholding to cover the prior year's tax liability, there won't be a penalty. The IRS won't assess a penalty for underpayment (assuming all you have is earned income) because it's assumed that withholding is paid evenly throughout the year.

That said, that method can really blow up in your face unless you're an absolute ace at tax preparation. Also, is it really worth the hassle to go through all of those calculations just to earn a few dollars of interest? My recommendation would be to make sure you're not withholding more than is necessary, but I just thought I'd throw that above information out there for you to chew on.

Answer 2

Because the law says that you must pay as you go. Congress makes the laws. The IRS just administers them.

From a practical point of view, how many people do you really think would have the self-discipline to actually save money toward their taxes as you suggest? And how many would get to the end of the year and, having spent their money through the year, would not have the money to pay what they owe?

If you get a big refund, then yes, you're giving Uncle Sam an interest free loan. But if you have close to the right amount deducted or paid in through the year, then you're paying your bills when they're due, not giving the government a loan.

Why can't you just pay your mortgage payment, utilities, and all your other bills once, at the end of the year, instead of paying them monthly? Same logic. The companies need a reasonably even flow of income to operate - so does the government.

Answer 3

Even though the IRS will not let you claim exempt, because they are based on a pay as you go system.

You will want to modify your thinking to work within the law. The thing you will want to do is avoid the underpayment penalty,

Your goal will be through payroll withholding is to make certain what you have enough withholding taken out to equal last years tax liability or make certain you do not owe more than $1,000 at the end of the year. You will want to do which ever will places you in a better situation with your withholding.


This will allow you to save as much money as possible and avoid losing the savings to penalties.

Answer 4

Because the Tax system was set up by Congress to be a pay as you earn system. If the majority of taxpayers did not have the taxes withheld, the money would not be saved but spent on other things, thereby leaving the taxpayer with a balance they owed, plus penalties and interest

Answer 5

For the sake of discussion - lets forget that its the law to pay-as-you-go - how are you going to get everyone to pay up?

In addition, you could modify your exemptions so you pay in whatever you set it up as. Its not like anyone stops you from claiming yourself plus 10 exemptions on your w4 so you get almost nothing withheld.

Of course the law is also setup that if you don't pay in enough during the year you are hit with a penalty.

Answer 6

I TOO HATE Tax Refund and like little Tax Liability during tax season.

You can claim exempt from withholding any taxes for 2007 if your tax situation satisfy the following conditions (from w4 form).

1) Last year I had a right to a refund of all federal income tax withheld because I had no tax liability and
2) This year I expect a refund of all federal income tax withheld because I expect to have no tax liability.

If these conditions are not applicable, still you can archive similar results by claiming a high number of exemptions in your w4. You can use on the withholding calculators to find the exemption count appropriate. http://findtaxservice.com/taxcalculator/tax-withholding-calculator.html

But, IRS will not like your approach. They may require you to pay estimated taxes for the following year if too less taxes were withheld from your paycheck.

A better and smart approach is to have zero liability at the end of the year

A financially smart approach is to claim very high of number of exemption from Jan - Oct or so and estimate your tax liability for the expected income for that year. Then adjust your w4 for the year by claiming "0" exemptions and pay additional taxes in remaining pay check. I do it myself.

Caution!!..Do it only if you are financially disciplined and won't spend all your money every paychecks.

Answer 7

Because they government needs money every week, not just on April 15th.

I'm a big fan of the idea of stopping all withholding, and making people write checks every quarter to the government. Make them realize what they are really paying.

Answer 8

Because the law states that taxes are due and payable when the income is earned, not when you file your tax return.

The IRS doesn't care how the system works. They just have to operate within the law. Congress writes the laws, not the IRS.

Answer 9

If you have wages, the IRS requires that you pay taxes as you earn the income. However, withholding of wages is considered as paid over the year.

So, if you do not withhold enough taxes, you can adjust your withholding in December and make up for the required taxes, and not owe a penalty.

So, you can do what you propose, within limits.

Answer 10

I love your idea. But as good citizens we have to follow thw LAW!!!