I have two properties in which my mortgage interest supplies great tax deductions. This year, instead of paying my income taxes out of each bi-weekly paycheck, I decided to file exempt so that no taxes are taken out of my pay. I will keep this money in a savings or money market just in case I run into problems next year. Is this a wise decision? Will this throw up a red flag with the IRS? Are there better ways to pay less/no taxes without filing “exempt” on my employers tax form?
Thanks in advance
nope, you can not do that unless you want to pay some large penalties or you want to make estimated payments each quarter. you need to have paid something like 90% of the previous year tax liability or you will be subject to penalties. I don’t know the rules exactly off the top of my head; perhaps someone else can chime in with the exact rules (or you can visit to www.irs.gov and do a bit of reading)
great question davnic, I have almost the exact same situation, I look forward to a reply from someone with experience.
I am new to this forum today and look forward to learning from people like yourself.
I am planning to purchase 2 condos in the next week purely for investing purposes. They cost $400K each and rental should be $2500 per month for each. I could downpay $200K on each and see positive cash flow immediately, but something tells me I should put smaller downpay and but I won’t see monthly positive cashflow.
Any comments or ideas?
from IRS Pub 505…
"You can claim exemption from withholding for 2006 only if both the following situations apply.
For 2005 you had a right to a refund of all federal income tax withheld because you had no tax liability.
For 2006 you expect a refund of all federal income tax withheld because you expect to have no tax liability."
also if you are going to buy rental property you shouldl take a look at 1040 Sch E. Moreover, beware that you can only take a maximum of $25,000 in passive rental loss against active income up to an AGI of $100k for married couples. It phases out at $150k AGI and the loss is suspended. I point this out since your proposed condo investment will be a big money losser both cash flow and tax-wise (Sch E). You can not make your total tax liability go to zero based upon large losses from (passive) rental activities
Although we file our tax returns annually the government needs cash flow to operate. That’s why we operate in a pay as you go system. Review the tax laws closely and file an amended W-4 and claim the maximum number of exemptions allowed by law. This will reduce the interest free loan you are making to uncle sam thru the year.
Until I can find a good accountant for solid advice I am going to leave the taxes alone. Normally I use HR Block, I plan to find an accountant this year to help further. I ran a calculator at kiplinger’s webpage and based off their formula I should claim 20+ ememptions to lower my tax contributions and increase take home pay. Also, according to the tax laws I do not qualify to claim exempt this year.
Thanks for all the help, I appreciate the resonses and insight.
I think if you can classify as a real estate professional (750+ hours a year) your passive losses are not limited. At least, that is my reading of the code.
Kudos to John Hyre for putting me on to that.