Waiving Withholding Penalties Because I've Already Paid Same Amount as Last Year's Taxes

[nigelctmccallum]

Hello,

I paid $1,831 in federal taxes in 2018 because I graduated and only worked half the year. This year, I expect to pay much higher taxes due to working the entire year. I'm under the impression that I only need to have $1,831 in taxes withheld from my job to satisfy the 100% of previous years taxes requirement to avoid paying penalties/interest for under withholding taxes regardless of this year's income. If I stop having my employer withold taxes, can I simply deposit the money I'm not withholding in a high interest savings account and then pay all my taxes at tax time in 2020 (for 2019 tax year)? I've already had $8,900 withheld for the year to date. Please confirm this would void both penalties and interest. There is an exception on the irs website that says the previous year's taxes must cover a 12 month period (https://www.irs.gov/publications/p505#en_US_2019_publink[phone number removed]). Aren't all tax returns for a 12 month tax year? Or since I only worked half the year would I not be eligible for a penalty exclusion for having 100% of my previous year's taxes withheld?

[Anonymous · Accepted solution]

you are correct as to avoiding penalties.   the 12 month period refers to the period covered by the return not the number of months you worked. However, for an employer to withhold $0 you would have to claim enough in withholding allowances n a new W-4 for that to be the case. Probably more than you're entitled to. It is a misdemeanor federal offense to falsify withholding allowances. According to the IRS, a $500 fine can be applied to those who are caught knowingly raising allowances beyond a level that can be proven, resulting in less tax being withheld. If the IRS determines that an employee has falsified marital status or the number of dependents to pay less in taxes, the amount under-taxed is also likely to be sought.  

[nigelctmccallum]

Well that's news to me and yeah I am seeing this policy on the IRS website ("You can claim only the number of allowances to which you are entitled."). Multiple third party websites say you can effectively claim whatever number of allowances you want as long as you pay your taxes by the due date and withhold enough to qualify for waiving underpayment penalties. It appears this is not a frequently enforced law by the IRS and there is a lot of estimation involved anyway. I guess I'll just claim the maximum number of allowances I can justify and let Uncle Sam have a free loan. Thanks!

[dmertz]

The US tax system is a pay-as-you-go system.  There is nothing wrong with claiming as many allowances as needed to avoid a large tax refund as long as it does not result in a significant balance due.  The problem would be claiming an excessive number allowances resulting in your tax withholding being insufficient to reasonably cover your per-quarter tax liability for the year.  Claiming the appropriate number of allowances does not mean that you are giving Uncle Sam an interest-free loan, it means that you are simply paying on time and that Uncle Sam is not giving you an interest-free loan.