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Subject Author Date
Penalty for state overwithholding? John D. Goulden 01-23-2008
Posted by John D. Goulden on January 23, 2008, 1:58 pm
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 An interesting question came into the office the other day. The two clients
are newly married. One of them has back federal tax issues from joint
returns in a previous marriage; the claim of "innocent spouse" was denied
and this client's refunds are applied to this back debt. Now that this
client has remarried, the other is now an injured spouse and they must file
the appropriate paperwork to make sure that the second client's refund is
NOT applied to the first's back tax liability. They've already adjusted the
first client's federal withholding to be "just right" for that client's
share of their current tax liability, so the second client should get most
of their federal refund back. There are no back taxes owed to the state.

Of course they can avoid the injured spouse hassle and just file MFS. Alas,
there's enough for one to itemize, but not both. They suggest the following
strategy for tax year 2008: the first client cranks up their state
withholding (to the tune of $400 per month) and thus have sufficient "taxes
paid" in 2008 to itemize as well (in about the amount of the standard
deduction for MFS) - then they both itemize on MFS returns. Both fully
understand that the resulting large state refund will be taxable income the
next year. They're willing to do this for as long as it takes (for the
former spouse to make good on the debt, to get an OIC accepted, or
whatever).

Any problems with this? Do states penalize for substantial overwithholding
(the state in question is OK)? Will the IRS see this as an illegal dodge?
Inquiring minds want to know...

--
John D. Goulden

--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
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Posted by Mark Bole on January 23, 2008, 2:39 pm
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 John D. Goulden wrote:
> An interesting question came into the office the other day. The two clients
> are newly married. One of them has back federal tax issues from joint
> returns in a previous marriage; the claim of "innocent spouse" was denied
> and this client's refunds are applied to this back debt. Now that this
> client has remarried, the other is now an injured spouse and they must file
> the appropriate paperwork to make sure that the second client's refund is
> NOT applied to the first's back tax liability. They've already adjusted the
> first client's federal withholding to be "just right" for that client's
> share of their current tax liability, so the second client should get most
> of their federal refund back. There are no back taxes owed to the state.
>
> Of course they can avoid the injured spouse hassle and just file MFS. Alas,
> there's enough for one to itemize, but not both. They suggest the following
> strategy for tax year 2008: the first client cranks up their state
> withholding (to the tune of $400 per month) and thus have sufficient "taxes
> paid" in 2008 to itemize as well (in about the amount of the standard
> deduction for MFS) - then they both itemize on MFS returns. Both fully
> understand that the resulting large state refund will be taxable income the
> next year. They're willing to do this for as long as it takes (for the
> former spouse to make good on the debt, to get an OIC accepted, or
> whatever).
>
> Any problems with this? Do states penalize for substantial overwithholding
> (the state in question is OK)? Will the IRS see this as an illegal dodge?
> Inquiring minds want to know...
>

I don't understand how this will help anything, other than shift a few
thousand of income from one year to the next (not useful if in the same
or higher tax bracket the following year). Between the two of them,
they either have enough Schedule A items to benefit from itemizing, or
they don't, in which case they should be taking the standard deduction,
whether MFJ or MFS.

Better yet, just have the second client adjust his or her withholding
also, to eliminate any sizable refund or even have a small balance due.

-Mark Bole

--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>

Posted by eagent on January 23, 2008, 3:09 pm
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> John D. Goulden wrote:
> > An interesting question came into the office the other day. The two clients
> > are newly married. One of them has back federal tax issues from joint
> > returns in a previous marriage; the claim of "innocent spouse" was denied
> > and this client's refunds are applied to this back debt. Now that this
> > client has remarried, the other is now an injured spouse and they must file
> > the appropriate paperwork to make sure that the second client's refund is
> > NOT applied to the first's back tax liability. They've already adjusted the
> > first client's federal withholding to be "just right" for that client's
> > share of their current tax liability, so the second client should get most
> > of their federal refund back. There are no back taxes owed to the state.
>
> > Of course they can avoid the injured spouse hassle and just file MFS. Alas,
> > there's enough for one to itemize, but not both. They suggest the following
> > strategy for tax year 2008: the first client cranks up their state
> > withholding (to the tune of $400 per month) and thus have sufficient "taxes
> > paid" in 2008 to itemize as well (in about the amount of the standard
> > deduction for MFS) - then they both itemize on MFS returns. Both fully
> > understand that the resulting large state refund will be taxable income the
> > next year. They're willing to do this for as long as it takes (for the
> > former spouse to make good on the debt, to get an OIC accepted, or
> > whatever).
>
> > Any problems with this? Do states penalize for substantial overwithholding
> > (the state in question is OK)? Will the IRS see this as an illegal dodge?
> > Inquiring minds want to know...
>
> I don't understand how this will help anything, other than shift a few
> thousand of income from one year to the next (not useful if in the same
> or higher tax bracket the following year).  Between the two of them,
> they either have enough Schedule A items to benefit from itemizing, or
> they don't, in which case they should be taking the standard deduction,
> whether MFJ or MFS.
>
> Better yet, just have the second client adjust his or her withholding
> also, to eliminate any sizable refund or even have a small balance due.
>
> -Mark Bole
>
> --
> << ------------------------------------------------------- >>
> << The foregoing was not intended or written to be used,   >>
> << nor can it used, for the purpose of avoiding penalties  >>
> << that may be imposed upon the taxpayer.                  >>
> <<                                                         >>
> <<   The Charter and the Guidelines for submitting posts   >>
> <<  to this newsgroup as well as our anti-spamming policy  >>
> <<                  are atwww.asktax.org.                 >>
> <<         Copyright (2007) - All rights reserved.         >>
> << ------------------------------------------------------- >>- Hide quoted
text -
>
> - Show quoted text -

I'm with Mark on this one - have your clients CUT their withholding so
they get a small or no refund - or better yet, have them owe about
$500. They can then invest the extra cash - even if it's just in a CD
at the bank - and have enough to pay the balance due.

And don't count on the first expouse taking care of this. If that was
going to happen it should have by now. My bet is that the former
spouse is counting on your client taking care of some of that old
liability, but who knows.

Lastly, can anyone tell me PLEASE why the whole world thinks a BIG
refund is gift from heaven? It's YOUR MONEY to start with - I've told
more than one client that I'd be more than happy to have them come by
every Friday and leave a couple of hundred bucks with me and that I'd
give it back to them on April 15. Oddly, no one has taken me up on
this - maybe they like the IRS better than me!

Gene E. Utterback, EA, RFC, ABA

--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>

Posted by Gil Faver on January 23, 2008, 3:30 pm
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>
> Lastly, can anyone tell me PLEASE why the whole world thinks a BIG
> refund is gift from heaven? It's YOUR MONEY to start with - I've told
> more than one client that I'd be more than happy to have them come by
> every Friday and leave a couple of hundred bucks with me and that I'd
> give it back to them on April 15. Oddly, no one has taken me up on
> this - maybe they like the IRS better than me!


This is the same reason that many people who don't have to write a check to
the IRS in April say "I didn't have to pay any taxes this year".

That reason, however, is beyond me.

--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>

Posted by Alan on January 23, 2008, 3:31 pm
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John D. Goulden wrote:
> An interesting question came into the office the other day. The two clients
> are newly married. One of them has back federal tax issues from joint
> returns in a previous marriage; the claim of "innocent spouse" was denied
> and this client's refunds are applied to this back debt. Now that this
> client has remarried, the other is now an injured spouse and they must file
> the appropriate paperwork to make sure that the second client's refund is
> NOT applied to the first's back tax liability. They've already adjusted the
> first client's federal withholding to be "just right" for that client's
> share of their current tax liability, so the second client should get most
> of their federal refund back. There are no back taxes owed to the state.
>
> Of course they can avoid the injured spouse hassle and just file MFS. Alas,
> there's enough for one to itemize, but not both. They suggest the following
> strategy for tax year 2008: the first client cranks up their state
> withholding (to the tune of $400 per month) and thus have sufficient "taxes
> paid" in 2008 to itemize as well (in about the amount of the standard
> deduction for MFS) - then they both itemize on MFS returns. Both fully
> understand that the resulting large state refund will be taxable income the
> next year. They're willing to do this for as long as it takes (for the
> former spouse to make good on the debt, to get an OIC accepted, or
> whatever).
>
> Any problems with this? Do states penalize for substantial overwithholding
> (the state in question is OK)? Will the IRS see this as an illegal dodge?
> Inquiring minds want to know...
>
If MFJ gets a better result than MFS, why aren't they just
planning their taxes so that at the end of the year they owe the
maximum allowable amount before penalties kick-in or just don't
have a refund?

--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>

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