1st Year of FIRE: tax planning and withholdings?

[BBQ-Nut]

I hope everyone had a good Christmas and are relaxing.

My question has to do with tax planning with regards to withholdings and estimated taxes.

First year of FIRE for me will be 2015, but my DW is still w*rking.

I will have a modest monthly pension and plan on selling After Tax assets early in 2015 (purely LTCG equities) and also plan to supplement any shortfall later in 2015 from a 401k distribution as my reserve to pay my portion of the expenses that we split.

Since I won't have earned income, my DW will need to adjust her W4 and her withholdings to meet what taxes I have estimated for 2015. And I will need to submit a W4P for withholdings from my pension.

We have two boys both in school and being claimed as dependents.

I have estimated taxes for 2015 and have target dollar amounts as withholdings for both myself and my DW - is there a way to backwards calculate what to put on the W4 forms?

Say if we want to target a yearly Federal withholding of $6500 for my DW, can I work backwards to what a revised W4 would look like?

Thanks!

 

[davismills]

I use H&R Block tax preparation software each year to calculate my taxes. Then I make the assumption that the following year will bring minimal tax changes and I do a "what if" type of tax return for the coming year. My pension is paid monthly so I adjust my withholding to cover about 95 percent of the upcoming tax liability. I just add an additional amount to be withheld each month. Hope I read your question correctly.

 

[Animorph]

Last time I filled out a W-4 (a long time ago) you could select the number of exemptions or whatever you were entitled to due to itemized deductions and other considerations. However, there was also a simple line that said add the amount you entered to your withholding for each period. I usually went with zero exemptions and set the extra dollar amount to what I needed. Very easy if you know what your base level of withholding is already. Otherwise, you'll have to look up the withholding tables and see what they do by default. I would think for your pension at least the default would be 0% or a similar simple percentage.

 

[kaneohe]

Tables at the end of this http://www.irs.gov/pub/irs-pdf/p15.pdf
Pick your status (single/married) and pay period (wkly, etc) and tune your exemption # to get the correct $ amount you want withheld. Be sure to check the paycheck withholding to see that it is consistent.

I've never used them myself......used the previously described technique of underwithholding and then adding a fixed $ amount /pay period.

 

[Brett_Cameron]

I made a spreadsheet that models income and income tax calculations. I set up a withholding calculator using the parameters from IRS Notice 1036. I use the spreadsheet to vary # of exemptions and extra withholding $ to make the final 1040 form taxes slightly positive. Comes out close and conservative relative to Turbo Tax calculations.

 

[meierlde]

Actually for 2014 if you make level estimated payments the penalty according to form 2210 is 1.995% on the unpaid balance. (If you make uneven payments you have to use the long method) But then if you make withdrawals late in the year and you use the regular method the interest due is 3%* the number of days late. So the penalty is not to bad due to the low short term interest rates.

 

[pb4uski]

.... I have estimated taxes for 2015 and have target dollar amounts as withholdings for both myself and my DW - is there a way to backwards calculate what to put on the W4 forms?

Say if we want to target a yearly Federal withholding of $6500 for my DW, can I work backwards to what a revised W4 would look like?

Thanks!

Yes you can. There are paycheck calculators out there that you can put in DW's earnings per pay period, withholding status, etc and it will calculate the various withholdings and her net check. Just play with the withholding status until the withholdings for a year are equal to your target.

If it were me, I would just adjust DW's so that her tax withholdings are equal to your total expected tax liability for the year and forget about having to do estimated taxes.