Federal Income Tax Withholdings... Who Needs That!?

[myrdale]

I've got a friend I've mentioned a couple of times, the one with the outrageous car loan. She was discussing taxes this weekend, and if what she said is accurate, I am absolutely floored.

She has been a stay at home mother for the last +15 years, with 5 kids (1 from previous marriage, 2 from current marriage, 2 who are his niece and nephew which they have custody of). He works construction. Supposedly his income is <$45k. Supposedly they get about $10k back in tax credits each year.

They bought a house two years ago. Money got tight. He regularly works <40 hours, and regularly claims his company is "forgetting to pay him". They are on the rocks and she is very close to moving on.

In preparation for the next chapter in her life she started a job. Next month will be her 1 year anniversary. From what I gather, she is at minimum wage, thought she could walk across the street and triple her income today.

It sounds like she is waiting on tax time to start the divorce proceedings, depending on that $10k refund (not sure that is the right term). We told her to keep in mind that since they now have two incomes they may not get all the money they are expecting back, especially depending on how much they are paying in income tax. Then she said it: "I'm not paying anything in on federal income tax".

I am afraid she is going to get hit with a $5k tax bill and penalties. Are my concerns unfounded?

[disneysteve]

Is her job paying her "under the table"? It sure sounds that way if they aren't withholding taxes.

I don't know how the tax credits work but I would imagine it's related to your income (your legit reported income). So yes, if her income has gone up, they could be over the limit for the credits or at least some portion of them.

That said, with a family of 7 earning that little, they probably still qualify for a bunch of assistance.

[kork13]

Also consider that many (most) folks have no idea what their paychecks actually go to, how much taxes they actually pay, or any number of other issues regarding their finances. I'm assuming that your company is legitimate, so unless she files a W4 stating a tax exempt status, she will be getting something withheld.

But as stated, her family may very well have zero tax liability. The federal poverty level for a family of 7 is slightly above $40k/yr. Even if she's earning another $20k with her min wage job, their tax burden will still be very low. Just the basic exemptions would cut their taxable income almost in half, then the various tax credits for kids & such would knock their ~$3k tax burden down to zero or negative very quickly.

[myrdale]

Is her job paying her "under the table"? It sure sounds that way if they aren't withholding taxes.

I don't know how the tax credits work but I would imagine it's related to your income (your legit reported income). So yes, if her income has gone up, they could be over the limit for the credits or at least some portion of them.

That said, with a family of 7 earning that little, they probably still qualify for a bunch of assistance.

It's a national chain store she works for, so I wouldn't expect it to be under the table. His job is with a construction company of moderate size so no funny business there either. Making too much to be applicable for all this government aid is a good thing.

Without seeing actual pay stubs I don't have much more than what she says to relay to you. I think she said she is listed as S-3, and he is the same, and that no taxes were being taken out.

Then again, I think it's like 57% of the population didn't pay federal income tax in 2021 so, she may actually be correct? I just have a hard time getting my head around that.

[Joan.of.the.Arch]

Are you trying to advise this person, or just trying to get your head around the situation?

I say this based only on their $45,000 earnings; if it is more now it might not apply at all:

If they are super frugal and organized in their budget, they may not have been "allowed" to have any savings more than, oh $2000-$3000 (for that car or whatever) without losing any Medicare or SNAP benefits. So crazy as that car (and house?) purchase sounds, they may have been doing about what they were "forced" to do in order to stay above water at all. Even if they don't have Medicaid for their own kids, they may have it for the niece and nephew. I've heard of kids in guardianship coming with Medicaid when it is a court-involved placement. They might be getting guardianship payments from the state (sort of like AFDC) And you know there remains such stigma toward getting public aid that this woman may not have told you about it.

Hey, besides the earned income tax credits they they may have been receiving, there were also the pandemic support payments for families with children. That has ended / is ending(?) which needs to be recognized when planning for the near future.

I have no problem with her and/or her husband claiming what ever number of dependents it takes to keep their whole paycheck with no federal income withholding. Obviously, they just need to know what they are doing so they don't get caught with a bill come April.

Five kids and under $45,000! If that is all there is to the income and support story then I can't imagine the daily stress. Plus piling a divorce on top. Rough!

[jenn_jenn]

I think it's like 57% of the population didn't pay federal income tax in 2021

I don’t have any advice for your friend (sorry!) but I was shocked to read this so I looked this up. You are correct, 57% of American households do not pay federal income tax. My jaw is still on the floor.

[disneysteve]

I don’t have any advice for your friend (sorry!) but I was shocked to read this so I looked this up. You are correct, 57% of American households do not pay federal income tax. My jaw is still on the floor.

The folks who frequent this forum are very much in the minority of Americans. Most people don't make very much. They don't earn enough to owe taxes. When you're making a good living it's easy to forget (or not even recognize) how the rest of the population lives. Here is a perfect example: a family of 7 making 45K. I can't imagine that struggle. When I was full time, I made 45K by the 2nd week of March, and we're only a family of 3 (and our daughter is an adult with a full time job).

[myrdale]

Are you trying to advise this person, or just trying to get your head around the situation?

It's a bizarre situation. She'll discuss her situation openly, but doesn't tend to be receptive to advice. For the most part I've learned to just keep my mouth shut. To that end I probably fall into the "get your head around the situation" category, but occasionally she'll say things and you can't help but want to suggest there may be a better way.

Despite so many things that appear to be an absolute train wreck in their situation, they have done astonishingly well with little. They don't do SNAP, or receive any support from the state for the niece and nephew. They finally got PeachCare (like Medicaid I think) but they don't have any current medical issues. Other than old medical debt (not alot of it at that) they are debt free other than the car and house.

The other half of the story is she suspects he's having an affair (sexting and disappearing at weird hours), he's verbally abusive (we've heard phone conversations first hand). I want to give him ALOT of slack considering he's been the sole bread winner all this time. Most of this I just shake off but some of it is kind of bothersome.

I will not advise her anything on her marriage, but when she is receptive to the financial discussion, I try to provide solid advice. Like I said she is working again after 15 years and I suspect she is planning on ending the marriage soon. My hope is she hits the ground running, rather than tripping up over IRS debt.

[MonkeyMama]

It sounds right to me that they would get a large refund with all of those child tax credits. I wouldn't worry about it. They aren't going to owe anything. & if she keeps the kids, she will keep the tax break too. Might not be as big as a refund as they are used to, but their refund is more tax credit driven and her income won't move the needle much.

We haven't paid any substantial income taxes since having kids. (Some years the government paid us; refundable tax credits). We don't withhold any (income) taxes from my husband's small paycheck, accordingly. We have a lot more income and way less kids than OP scenario. I mean, at this point we have zero child tax credits (both kids just aged out), but still don't pay enough tax to bother withholding any from my husband's checks.

Edited to be clear: I mean we don't withhold any income taxes from my spouse's small second income (second income to my primary income). We don't claim exempt. But completing W4 appropriately = no taxes on small individual paycheck.

[ua_guy]

myrdale but why do you care so much about how other people manage their money? And why are you talking about this person’s affair online? You think she’d want you talking about that to everyone? Or about her marriage?

[myrdale]

myrdale but why do you care so much about how other people manage their money? And why are you talking about this person’s affair online? You think she’d want you talking about that to everyone? Or about her marriage?

Why do you care so much about what I care about?

[Petunia 100]

Minimum wage in Georgia is only $7.25 an hour, correct? Yes, of course it is possible that she is having $0 withheld for federal income tax. If she works 40 hours per week all year long, she is only going to gross 15k.

[LivingAlmostLarge]

Minimum wage in Georgia is only $7.25 an hour, correct? Yes, of course it is possible that she is having $0 withheld for federal income tax. If she works 40 hours per week all year long, she is only going to gross 15k.

Is that enough to live on even in georgia? Or two people working making $30k? Is it a starter job?

[disneysteve]

Is that enough to live on even in georgia?

Minimum wage isn't enough to live on anywhere. That's the problem with it.

[Petunia 100]

Is that enough to live on even in georgia? Or two people working making $30k? Is it a starter job?

It sure doesn't seem like enough to me. The husband in this family makes 45k.