Q:

Subject: Question for your Blog:  Adjusting W-4 Withholding Allowances

Dear Kerry,

 

For both 2004 and 2005, my wife and I, who both work, filed our federal income taxes as “Married filing jointly,” and in both years, we received over $4,000 in federal refunds.  I am assuming this is because neither of us has changed our withholding allowances on our W-4s (both of our W-4s list us as “Single” with only one allowance each).

 

When I went to the IRS “2006 Withholding Calculator” and entered all of our information, the web site directed each of us to REDUCE the number of allowances for 2006 to zero and to specify that we withhold an addition $45 from each of our paychecks.

 

I thought that if we wanted our employers to withhold LESS tax, we should INCREASE the number of allowances.  I didn’t think we would need to see a CPA for something as “simple” as this.  What is going on here?

 

Thanks in advance.

A:

You are correct that you need to increase the number of exemptions you booth need to claim on your W-4s.

Most people don’t handle the itemized deduction part of the W-4 calculator and under-count the number of exemptions they are entitled to.

This is the kid of thing you should be working with a professional tax advisor on.  Nothing in the tax arena is simple enough to handle on your own.

Good luck.

Kerry Kerstetter

Follow-Up:

“Nothing in the tax arena is simple enough to handle on your own.” — I’m beginning to see that.

Thanks for your quick response and help, Kerry.  I certainly appreciate it.

 

Q:

Subject: Exchange Question

My wife and I own 2 homes within 55 miles of each other.

We consider one our primary, the second we are there all our free time.

With retirement coming in 8 years or less we wonder if we will be able to afford to keep both and if not is there a way one of us can change address, auto registration, voting etc. and have 2 primary residences with the hope that if we had to sell one or the other we could avoid capital gains ?

Thank you.

A:

This is the precise kind of thing that you need to be working with your own personal tax professional on.

Issues that you will need to consider when working up a strategy with your personal professional tax advisor should include the fact that no person is allowed to simultaneously have more than one primary personal residence.  You and your wife could each have one, but you would have to be ready to prove that you each lived full-time in separate homes.  Each house would also only be allowed a maximum of $250,000 tax free gain.

A more lucrative plan, depending on the size of the profits involved, would be to sell the home in which you have lived for at least two years, claim up to $500,000 of tax free profit, and then move into the second home, live there for two years, and sell it with up to $500,000 of tax free gain from its sale.

This is a overly simplistic description of the plan and will need to be fine tuned with your own personal professional tax advisor, especially in regard to any depreciation that may have been claimed on either home.

Good luck.

Kerry Kerstetter

Follow-Up:

 Thank you Kerry, I hope to get help soon as I am a “pre-retirement” person of 58 yrs old.