"We are renters, looking for a place of our own. Our realtor said to get more "take home pay," we should up the [withholding] numbers - even 3 or 4, even though we have no dependents, not sure if that is legal."Calculating a level of withholding that is "just right" takes me as much time as preparing a tax return sometimes. The easiest course of action is for both spouses to claim Married-1 as their withholding allowances. This usually results in a refund for most people. But just this year I discovered a situation where Married-1 for both people underpaid the tax, a most bizarre circumstance, and it still leaves me wondering what happened mathematically.
The more accurate way to do this is to create a projected tax return for 2009. Calculate your income and deductions, and then use the 2009 tax rates to find out what the tax will be on the scenario, Then use a withholding calculator to see what the suggested withholding allowances might be. Then plug your income and new withholding allowances into a payroll calculator. Use those figures to see what your new paycheck might look like. Then, extrapolate those numbers for the rest of the year (plus the withholding you already have year to date) to see what your total withholding will be. Do this for both paychecks. Then compare your total withholding to your tax projections. If the withholding is too high or too low, go back to the payroll calculator to fiddle with the withholding allowances. Try Single instead of Married, or try changing the withholding allowances by one point at a time. (For example if you used Married-5 the first time, try it with Married-4.) Re-extrapolate the annual numbers and compare. Repeat this process until you find the withholding level that will be just right for you. I try to get the withholding to produce a refund in the range of 500 to 1000, figuring that gives my clients enough wiggle room so to speak so that any tax changes will not result in owing very much.
You might want to keep track of all of this on a spreadsheet. This will make it easier for you to build alternate scenarios and projections.
Do the same projections with your state taxes as well.
Your realtor's suggestion is basically that if you buy a house, then you'll be able to deduct mortgage interest and property taxes, as well as your state income taxes. Thus in making your scenario for next year, you might make one for now assuming you stay renters, and then make another scenario for buying a house and having extra deductions. Then, when you do buy the house, you'll be able to adjust your withholding to take into account your extra deductions, and thereby have less tax deducted and higher take-home pay.
For a Real estate investment property can the refinance cost be added to the basic cost?
Ana, generally, no. Refinance costs are generally not part of the property’s cost basis. See this section of Publication 551 for what goes into the cost basis of real property. The IRS states that, “You cannot include fees and costs for getting a loan on the property.” Points paid on the loan, however, may be deductible as an interest expense.
Hi William,
Your post regarding tax payment and planning for the next coming year is wonderful. Your tips really seem helpful to apply. I have studied your complete post and I find lot of solutions. One has to plan himself or herself based on the changes that are expectantly applicable for the coming year. For that, first calculate incomes and deductions and then plan it accordingly. This will provide us to calculate more accurately.
Your tips will help a lot of people who are looking to plan themselves to figure out accurate deductions.
Thanks,
Steve Randel
Thank you for your informative articles, William!
Monica
this article was EXTREMELY helpful–exactly what i needed to know with very useful links. thanks so much!