IRS – I take back all the nice things I recently said about you…YOU STINK!
Or it’s probably congress who stinks, I’m not sure who, but basically whoever is responsible for IRS Publication 15 (Circular E – Supplemental Wages) THEY stink. This rule is going to cost us over $300 of our own hard-earned money.
The rule is regarding the tax treatment of bonus checks. My husband receives a once a year bonus check in March. According to the above rule, this check is taxed at a mandatory 25%.
As I’ve stated before our effective tax rate is a ridiculous 1.26%. I know, I don’t have a lot of room to complain with a tax rate like that, but we have deductible mortgage interest and property taxes, deductible student loan interest, crazy “city wage tax” and state taxes, three kids and are squarely middle class so it’s not like we are doing any creative accounting. ( I don’t even bother with our meager charity deductions because I feel I little guilty about this.)
I changed the w4 withholdings to 15 exemptions this year to no avail! The paychecks don’t have a penny of Federal Taxes withheld and we will still get close to $3000 refunded. The IRS will hold 23.74% of that bonus check in their coffers from March 2010 until we get it back in the form of a tax refund in MARCH of 2011.
In the meantime we will pay interest on credit cards with rates as high as 24.5%. In the past I didn’t care, I loved that BIG REFUND. But now that we are serious about no debt, and have a plan in place to get rid of it all, I’m a little miffed. Each time I make a “Debt snowball” payment (or “debt avalanche” payment to be more precise) I choke a little when I see how much of it goes to the interest and not the principal. That chuck of our money we have to wait a year for would really speed up the process and save us money in interest or go to beefing up the emergency fund which would earn interest for us.
Do you think I can invoice the government for all the accumulated interest we will pay over this year? I mean I don’t expect them to pay interest on tax refunds when most people who CHOOSE to CAN avoid them – but what if the IRS won’t ALLOW you avoid a refund?
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Stay at Home Mom CFO - one mom, one income, too many issues... 
March 18, 2010 at 2:11 pm
Here’s my 2 cents. Beef up the EF and use the rest for the debt. DON’T worry a bit about interest on EF money, it DOESN’T matter. You need to get out of debt before caring about that little bit of money.
March 18, 2010 at 2:27 pm
Dr. Jeff – You are slowly making me less bitter and more focused on the things I DO have control over. In homage to the last gasps of my “old self”, “Where the HELL were you 4 years ago to stop me before I created this monster?!” 🙂
March 18, 2010 at 2:42 pm
Oooph! I remember back when I had just paid off my credit card, I ended up having to charge $500 back on there to live through the end of the year and . . .surprise: that was the amount of my refund. Grrrr.
March 18, 2010 at 3:00 pm
One thing that I frequently have to tell myself to keep in mind is the fact that, with kids, a great deal of that refund is from credits and such. The W4 is meant to take that into account, but it really doesn’t very well. It’s unfortunate that they won’t let you keep that withholding if your W4 would indicate that it shouldn’t be withheld.
Thanks for the link too!
March 18, 2010 at 4:35 pm
BB – Your post was a great post explaining the nuances of both approaches! Thanks for that.
March 18, 2010 at 10:54 pm
That would drive me a little batty. Does your family qualify for earned income? Or is it just that one bonus check that does it? If you are eligible for earned income you could get that money back in his paycheck: http://www.irs.gov/individuals/article/0,,id=96515,00.html ??? Seems there should be some way around this problem. If you do figure out something, I hope you’ll blog about it and let us know!
March 19, 2010 at 7:55 am
Nope. We don’t even come close to qualifying for EIC. I’ve called the IRS 2x for some info and the first person told me I’m not allowed BY LAW to have more than 10 exemptions on the w4. Ummm, WRONG! She fought with me about it for 20 minutes before she put me hold and never came back. The second person told me there is no way to avoid this…I’m going to keep checking.
March 19, 2010 at 12:44 pm
Oh, isn’t it fun talking to the IRS? I do the books for a small company (the owners are Hispanic, more comfortable speaking Spanish, elderly and the husband is legally blind) and have had to talk to IRS on their behalf several times. One thing I can tell you, if the first or second person you get on the line is not very nice, well, your cell phone reception just got real bad all of a sudden-like so call back and hopefully the next person will be nicer. I am so curious to find out if there is any way you can get this resolved.
March 21, 2010 at 8:28 am
[…] I’ve Jumped Through EVERY Hoop and we Still Can’t Avoid a TAX REFUND: I found this an interesting take on how taxes and W-4s work. […]
March 21, 2010 at 3:00 pm
It’s just too bad that there are two different options (exemptions and dollar amount withholdings) that allow for you to pay into the system, but no way to keep the scales tilted in the other direction.
I’m sorry it’s so frustrating but Jeff’s right: don’t worry about the interest. In comparison to all the things that you have done for the things you DO have control over, it’s not worth wasting your energy on this issue that no one would be able to change at our levels. That’s a fight for later, if ever.
March 21, 2010 at 3:31 pm
Sorry to hear that in spite of everything, you’re still going to get a tax refund. Still, it beats expecting to owe nothing and then getting slammed with a tax bill. The best thing you can do is just keep up the discipline on repaying your credit cards, and funnel all the money toward that or other goals when you do get your refund. (Sorry I’m not more help; there’s just not much to say.)