Is taking a high amount of withholdings to get less money taken out each paycheck illegal?

Question

If you made 3000/month and withheld 7 on your check to get more money each paycheck and use deductions on property tax and home interest to even out your tax bill at the end of the year is that illegal if you are married and have 1 child but are witholding 7.

The extra money each check would allow you to pay a higher mortgage than if the taxes were taken out.

Answer 1

No, it is not illegal to do what you are describing as long as your assumptions are correct. That is good tax planning.

By claiming 7 exemptions on your W-4 form, you are attesting that you expect to have around $23800 in total dedcutions (personal exemption(s) and the greater of either the standard deduction or itemized deductions) for the year. See the first link below. Start on page 35. The way the tax withholding formula works is that one exemption is allowed for every $3400 in planned deductions that you plan on having. It will increase for next year to $3500. This rule applies to both you and your wife. Both of you combined are allowed to claim a total of 7 exemptions in your case. If one of you claim 7 exemptions and the other claims 3, for example, you will probably owe at tax time.

You will need to be careful though, if you don't have enough tax withheld, then you could be subject to underpayment penalty. See the second link below. The information is for 2006. However, the information should be the same for 2007 and in the near future.

Answer 2

You are probably entitled to at least three withholding: Yourself; head of household; one dependent (four if your wife does not have a job). Although it is not illegal to add more, the IRS may ask for proof of such, but only if you receive a substantially larger refund than you normally would. However, since you will, ultimately, pay more taxes for the money you received, this is probably not a good strategy (most people think that they can put the non-withheld money into a savings account, and thus "make" money on the interest, but, in truth, the under 3% that a high-end savings/checkings account would give you is probably not worth it, not to mention that you'd have to pay taxes on the bank interest!!!).

Instead of adding deductions, consider putting a "minus" amount on the W-4 line that reads "Additional amount, if any, you want withheld from each paycheck". For example, putting "-500" means that you want to receive an additional $500. But, be VERY careful with this, because if it exceeds the ordinarily withheld amount, it will trigger LOTS of alarms with both your employer and the IRS (BTW, you should be able to do the same with your State W-4, if applicable).

You shouldn't risk potential penalties (and even jail time, should the IRS and your employer consider it "fraud") just to put more money in your pocket.

A far better method to all the above is to simply control your spending with a good budget. I know it's easier said than done, but if you haven't written down your income and expenses, and calculated your monthly payments - - which, BTW, is exactly what should have been done when you bought your property; your bank or legit mortgage company would have insisted on it - - then do so, NOW, and try to live within those constraints.

The link, below, is an IRS guide to properly adjusting your withholding.

Good luck!

Answer 3

It's only illegal if you cannot pay your taxes at the end of the year. As long as you can pay, there will be no problem. Since you are married, have 1 child, and own a home, you have more tax credits and it is possible, (depending on your income) that you will have little or no tax liability. However, if you end up owing at tax time and can't pay, the IRS may send a directive to your employer to withhold more taxes. Once your employer receives this directive, you can not change your withholding.

Answer 4

There is a worksheet on the back of the W-4 instructions that allows you to calculate the number of "allowances" (what you are calling withholdings) to enter, based on your expected deductions. Using this worksheet will allow you to enter a larger number and have it be correct according to the instructions. This solves the perjury issue raised in one of the other answers.

However, if the total amount withheld (taken out of each paycheck) over the course of the year is too low, there is a penalty at the end of the year (when you file your taxes).

Answer 5

You have to sign your Form W-4 under penalty of perjury. A false statement can lead to prosecution. Unlikely, but I have seen it done.

I am an enrolled agent licensed by the Treasury Department to represent taxpayers the same as CPAs and Attorneys. I specialize in clients who have outstanding tax bills. At least seven that I can think of right off did what you are writing about and all have or have had IRS levies on their wages. When IRS gets to you you can email me through your profile because I can always use fees from another client.

Answer 6

Not illegal, but you may find yourself regretting it at tax time. You are not breaking any law I've heard of, but the IRS seems to be a bit of their own law enforcement agency.

You have to look down the road, and not just in your immediate pocket for the right answer. If witholding 7 now causes you to pay $8,000 in January-April, is it worth it?

disclaimer:
$8,000 is just a number and in no way is it an educated nor informed monetary amount.

Answer 7

if you under withhold and owe too much at tax return time - they could hit you with penalties on top of the tax owed and if you can't pay all the tax at once, then you'll get hit with interest costs on top of that and they could garnish your wages