Why is my withholding so much lower than my expected tax?

[bUU]

I've used a few tools, most notably Quicken Tax Planner, and they're saying we're going to owe 29% of our tax liability after accounting for withholding. We both worked straight through the year, nothing unusual except a job change mid-year with no gap between, both with W-4's saying Married-1. And we haven't had anywhere near as much in terms of capital gains this year. (Very little actually - I tend to wait until the fall to determine whether this will be a good year to sell things, for the very reason.)

Any ideas what could have gone wrong?

I'm switching both of us to Married/Single Rate-0, for the remaining 4 pay periods. I hope that keeps us out of the doghouse.

 

[donheff]

It has been a long time since I evaluated this but, as I recall, the withholding tables are based on one income. If so, you are each withholding for a situation in which your joint return would have only your salary. Add the two salaries up and you push a substantial marginal amount into higher brackets thus the shortfall. Set your joint withholding to match your tax from the previous year and (absent salary changes) you should be OK.

 

[kaneohe]

Note that in addition to your allowance change the W4 allows you to withhold an additional amount that you specify per pay period. You should be able to get to exactly where you need with that once you see the effect of the allowance change.

If nothing much has changed income-wise as you say, then you should compare last yrs tax w/ your projection to see if that is reasonable; then compare last yrs withholding w/ this years withholding for both you and spouse. Doesn't seem like this could be that well hidden. Good luck!

since you only have 4 pay periods left, you might want to see the effect of the exemption change now so you can make the additional withholding change now if needed. See your HR person or,if you trust yourself, google for withholding tables online.

You imply but don't really say that everything was normal last yr. True?

 

[Willers]

It has been a long time since I evaluated this but, as I recall, the withholding tables are based on one income. If so, you are each withholding for a situation in which your joint return would have only your salary. Add the two salaries up and you push a substantial marginal amount into higher brackets thus the shortfall. Set your joint withholding to match your tax from the previous year and (absent salary changes) you should be OK.

This is correct. This has been significant issue for us over the last couple of years, with DW's default withholding being way too low. We had one unwelcome surprise like yours so I manage it more closely now. I can adjust my WH on the fly in Megacorp's system so I change it throughout the year based on where we are. I use TaxCaster about once/quarter as a check. I actually just turned my add'l WH off this morning since we're a bit ahead.

 

[bUU]

You imply but don't really say that everything was normal last yr. True?

Yeah, 2012 was okay. We owed tax, but not much.

See your HR person or,if you trust yourself, google for withholding tables online.

Interesting. I bet that my spouse's second employer figured withholding based on an assumption of no income in the first half of the year. If I understand these tables correctly, that means that assuming my spouse earned over $26,150 from the first job this year, then the first $26,150 earned from the second job would be taxed at an effective rate less than 7% instead of at 15%, and the rest at an effective rate of 15% instead of 25%.

 

[kaneohe]

Yeah, 2012 was okay. We owed tax, but not much.

Interesting. I bet that my spouse's second employer figured withholding based on an assumption of no income in the first half of the year. If I understand these tables correctly, that means that assuming my spouse earned over $26,150 from the first job this year, then the first $26,150 earned from the second job would be taxed at an effective rate less than 7% instead of at 15%, and the rest at an effective rate of 15% instead of 25%.

This is the first time that I've ever looked at those tables but I don't think your interpretation is correct............the number 26150 comes from a table titled annual payroll period. I doubt that you folks are paid annually. Your OP suggests the payroll period is monthly . I don't think there is any history involved in using the table. I think you just look at, in your case, the monthly income and read the withholding.

The reason I suggested looking at the tables is so you could estimate the new withholding before it took effect.
That way if you needed to revise the W4 to add an additional specified amount, you had more time to do it.
You should check your (spouses also) prior paychecks this yr to see if the withholding tables agree w/ the paychecks so you know you (and the company)are using the tables correctly.

 

[bUU]

Okay thanks for the clarification. So given that, I am back to having no idea why the withholding is so far off this year. I'll check out the tables again when I have more time, hopefully tomorrow morning. We've already submitted new W-4's but we can just as well resubmit saying we're more screwed up than we originally thought I suppose.

 

[kaneohe]

Okay thanks for the clarification. So given that, I am back to having no idea why the withholding is so far off this year. I'll check out the tables again when I have more time, hopefully tomorrow morning. We've already submitted new W-4's but we can just as well resubmit saying we're more screwed up than we originally thought I suppose.

I have complete confidence that you'll figure this out. I think it's just a mental thing (confidence) thing at this point........just like balancing a checkbook which is just a bunch of additions/subtractions coupled w/ human input......but it can drive you crazy till you figure it out. Are you going to let a bunch of numbers defeat you? Man up (or woman up) to it whichever is appropriate.

variables........income , tax calculation, withholding......if these are correct, the answer must be real.........tools: this yr vs last yr

there are other tax calculators: google for taxcaster or the H&R Block tax calculator to see if they agree w/ your Quicken

 

[jebmke]

Are you on track to meet the safe harbor limits? Is so, there isn't a problem. You might owe tax in April but no penalty.

 

[bUU]

Yeah I just read the IRS Publication through carefully, and found that there are three ways to clear the limit: Withholding within $1000; withholding at least 90% of tax; withholding at least 100% of last year's tax. If we actually get four more paychecks, withholding exactly the same amount as last week's paychecks, then we would end up withholding $600 more than last year's tax. With our changes this morning, to Married Withhold at Single Rate / 0, we'll clear that third threshold easily.

I believe that also exempts us from having to do Estimated Tax payments next year.

 

[rodi]

We got burned a few years ago - I was claiming zero, hubby was claiming 1. We have 2 kids. But because of capital gains we ended up owing significant taxes that year. Even had to pay a penalty.

I changed our withholding to both claiming zero. Mind you, we have two minor children. We break even most years. (Within $500 owed or owing.) We'll be losing the mortgage interest deduction soon - so that will effect our taxes also.

 

[kaneohe]

may or may not apply depending on income level.......but w/ one spouse
switching jobs, it is possible that too much SS tax will be taken which would be a credit for you. Just be looking for that possibility in April.

 

[jIMOh]

I've used a few tools, most notably Quicken Tax Planner, and they're saying we're going to owe 29% of our tax liability after accounting for withholding. We both worked straight through the year, nothing unusual except a job change mid-year with no gap between, both with W-4's saying Married-1. And we haven't had anywhere near as much in terms of capital gains this year. (Very little actually - I tend to wait until the fall to determine whether this will be a good year to sell things, for the very reason.)

Any ideas what could have gone wrong?

I'm switching both of us to Married/Single Rate-0, for the remaining 4 pay periods. I hope that keeps us out of the doghouse.

Would you make more than the social security maximum this year?

 

[bUU]

Social Security withholding doesn't affect federal income tax withholding.

 

[kaneohe]

Social Security withholding doesn't affect federal income tax withholding.

not directly but what we've been trying to tell you is:
If you change jobs and have a high enough salary, the second firm doesn't know how much SS has been withheld. If the salary is high enough that you would have reached the SS cap on one job, you may have too much withheld because you don't reach the cap on the 1st or 2nd job but would have if you had stayed put. You can, if you recognize that, ask for a refund . Since it can be applied to your income tax(I think), you may have too much withheld between the SS excess and your regular withholding.

 

[bUU]

My spouse won't come near the limit for Social Security, between the two jobs.