Tax Slaughter

[Stranger]

Hi all,

I am just starting in my career. This tax season was my first full year in the position. This year I owe a little over $12,000 in taxes... it appears the tax withholding schedules were not appropriate for the new tax rates, nonetheless.

My questions is: Would it be smarter for me to go to HR and have them correct the tax withholding, or should I take $500 every 2 weeks and place this money in an investment account or money market (planning to withdraw once a year for the tax season)?

Thanks in advance for reply/comments.
- Stranger

 

[REWahoo]

Someone will be along shortly to explain the IRS penalties for underpayment (under withholding).

 

[cathy63]

If you expect to earn about the same in 2019 as you earned in 2018, then you should fill out a new W4 form, which you can download from IRS.gov, and add about $1150 more in withholding per month. Turn that form in to whoever handles your payroll. If you get paid twice per month, that's $575 per paycheck.

$12K seems wildly off unless you're a very high earner though. Did you have investment or other income outside your job? Or do you have a spouse who also works? There are instructions in the W4 that can help you account for these situations.

 

[Stranger]

I'm a single filer. Make a little over 300k/yr. No other investment outside of the $5500 in backdoor Roth and 401 contributions. I anticipate making roughly the same this year.


This was my first year making the above income and was in a bit of shock when my CPA informed me what I owe this year. I will look into the W4 and take to HR.

 

[Aerides]

My questions is: Would it be smarter for me to go to HR and have them correct the tax withholding, or should I take $500 every 2 weeks and place this money in an investment account or money market (planning to withdraw once a year for the tax season)?

It is smarter to have HR withhold just enough to be at or slightly under your expected taxes. The money you'd make on that $12k will be far less than your penalty.

Even if the penalty were small, a strategy of heavily under-withholding each year would surely invite an audit sooner than later.

 

[travelover]

...........This was my first year making the above income and was in a bit of shock when my CPA informed me what I owe this year. I will look into the W4 and take to HR.

You might be in luck. If you had as much withheld this year as you owed last year you are in "safe harbor" as far as penalties for under withholding. Won't work next year.



https://www.irs.gov/taxtopics/tc306

 

[Chuckanut]

Don't over withhold very much. You might become a target for identity thieves who file a return under your SSN take your refund and disappear with the money. You will eventually get it back from the IRS, but it can take months or years to do so.

It's best to owe a bit. So far the identity thieves have not shown a predilection to pay taxes for other people.

 

[Maenad]

This happened to me and DH when we first tripped the AMT. We just bumped up our withdrawal on our W4s the next year. DH makes a game out of getting us as close to even as possible, usually between Fed and State we've netted no more than a few hundred in refund each year (owe one a bit, refund from the other a bit). This year is completely up in the air, so we'll see!

 

[USGrant1962]

Don't over withhold very much. You might become a target for identity thieves who file a return under your SSN take your refund and disappear with the money. You will eventually get it back from the IRS, but it can take months or years to do so.

It's best to owe a bit. So far the identity thieves have now shown a predilection to pay taxes for other people.

I don't think refund fraud has anything to do with what was withheld. The crooks just do a fake tax return with a stolen name, SSN, and birth date. They have no idea what was withheld, and can put anything they want on Line 16. They get away with it because historically the IRS issues refunds immediately, based on the return, and can't or doesn't cross-check everything first.

But, apparently the IRS implemented a new system and major crackdown starting in 2017, making refund fraud quite a bit harder. This article says they stopped almost a million fraudulent returns and $7.6B in refund fraud in 2017:

https://lbmc.com/blog/tax-identity-theft-refund-fraud

 

[RunningBum]

Don't over withhold very much. You might become a target for identity thieves who file a return under your SSN take your refund and disappear with the money. You will eventually get it back from the IRS, but it can take months or years to do so.

It's best to owe a bit. So far the identity thieves have now shown a predilection to pay taxes for other people.

I don't think it really matters. Tax thieves aren't filing a valid and correct return for you, they are filling in numbers to give themselves a nice refund. At least that's how I understand the scam.

 

[kgtest]

Someone will be along shortly to explain the IRS penalties for underpayment (under withholding).

since I will earn more, I witheld more this year. Also, if I were to bump into a higher income, I would want to adjust my witholding on my employers W4 forms.



Probably my least favorite form to update, quite honestly...seems like they never withold enough lol

 

[kgtest]

My questions is: Would it be smarter for me to go to HR and have them correct the tax withholding, or should I take $500 every 2 weeks and place this money in an investment account or money market (planning to withdraw once a year for the tax season)?

Thanks in advance for reply/comments.
- Stranger

No not smart. I understand your thinking...similarly if you applied this logic to your bundled PITI payment and unbubdled the TI (Taxes and insurance) paying those yourself instead of the mortgage company...then yes that would be smarter because you could invest the difference until the insurance and property taxes are due reaping the gains (or losses) from the markets.

 

[Omalley]

How much is your total tax liability? Generally, underwitholding by 10% will not generate a penalty. You just have to realize that a tax bill will be due every April and plan to have the required cash on hand.

Disclosure - I am not a lawyer or accountant...

 

[pb4uski]

I'm a single filer. Make a little over 300k/yr. No other investment outside of the $5500 in backdoor Roth and 401 contributions. I anticipate making roughly the same this year.


This was my first year making the above income and was in a bit of shock when my CPA informed me what I owe this year. I will look into the W4 and take to HR.

Ask your CPA to determine how many exemptions you should claim on your W-4 to have your 2019 withholdings come out roughly equal to your 219 tax obligation.... then go to HR and adjust your W-4 form.

You may want to do a little additional withhholding to make up any year-to-date shortfall.

You want to design your withholding so you owe a little ideally.

 

[pb4uski]

I don't think refund fraud has anything to do with what was withheld. The crooks just do a fake tax return with a stolen name, SSN, and birth date. They have no idea what was withheld, and can put anything they want on Line 16. They get away with it because historically the IRS issues refunds immediately, based on the return, and can't or doesn't cross-check everything first. .....

Yes, but these frauds can hold up a legitimate refund... if you design your withholdings to owe a little, then no problem... you send them in that little with your return and you are all set.... OTOH, if you are due a big refund because you overwithheld, then good luck getting your money back timely.

 

[scrabbler1]

Hi all,

I am just starting in my career. This tax season was my first full year in the position. This year I owe a little over $12,000 in taxes... it appears the tax withholding schedules were not appropriate for the new tax rates, nonetheless.

My questions is: Would it be smarter for me to go to HR and have them correct the tax withholding, or should I take $500 every 2 weeks and place this money in an investment account or money market (planning to withdraw once a year for the tax season)?

Thanks in advance for reply/comments.
- Stranger

Given that you are just starting your career, is it safe to say that you did not file a tax return the year before? That would put you into a safe harbor for 2018 (to avoid penalties).

As for 2019, others here have alluded to safe harbor provisions. The W-4 form has a worksheet which helps you figure out what your exemptions should be. When I was working, I always wanted to owe some money in April so I usually increased it by one, or at least rounded up if the ideal number was between two whole numbers.

Another thing to consider is if you need to use the same number of exemptions for your state and federal taxes. Your payroll will default to using the same number, but you can vary them. You would need to file a state-only version of your W-4 form so your payroll department can change only that figure while leaving the federal one alone. I had different exemptions for many years in my working days.

 

[brewer12345]

I'm a single filer. Make a little over 300k/yr. No other investment outside of the $5500 in backdoor Roth and 401 contributions. I anticipate making roughly the same this year.


This was my first year making the above income and was in a bit of shock when my CPA informed me what I owe this year. I will look into the W4 and take to HR.

Just change your withholding. When you do this year's taxes you can figure out what it should be.

The lack of any material investments while making 300k is a bigger concern. Stash it...

 

[38Chevy454]

Could you do a $18000 pre-tax contribution for 2018, which would offset maybe half of that $12000 owed? I think you can make a 2018 IRA contribution up until April 15 of this year that counts for last year, assuming you did not make any pre-tax contributions. That would also put $18K into your IRA now. Yes it results in approx $24000 in cash you need to come up with now ($18000 to IRA plus the $6000 for taxes), but it saves you $6000 in taxes owed.



I would set up pre-tax of the max for this year out of payroll deduction if you have that possibility. Depending on your company policy, you can then do after-tax contributions and do back door Roth conversions for more than the $6000 limit.

 

[Texas Proud]

I use to deal with payroll at one job and I have never seen where withholding was this far off with just salary income.... (well, unless you got a big bonus... sometimes they only take out 20% on a bonus which could throw you off)...



The caveat is if you put down something on your W-4 that had them withhold less for whatever reason.. but a change to that would fix the problem...

 

[HI Bill]

I've never had much luck relying on the W-4 to result in a correct withholding for my situation. After the first paycheck of the year, I evaluate the tax paid, and figure out the diffence between that (and future tax extrapolated to be paid over all the year's paychecks), and ask the company to withhold an additional $X per pay period. That way, I control how much goes out, and I'm not relying on the W-4's default calculations. I'm usually within $1000, of the correct amount, choosing to slightly overpay throughout the year. I also check withholding periodically througout the year, and pre-calculate the annual tax liablity ahead of time. No surprises that way for me, even for 2018.

 

[cathy63]

Could you do a $18000 pre-tax contribution for 2018, which would offset maybe half of that $12000 owed? I think you can make a 2018 IRA contribution up until April 15 of this year that counts for last year, assuming you did not make any pre-tax contributions. That would also put $18K into your IRA now. Yes it results in approx $24000 in cash you need to come up with now ($18000 to IRA plus the $6000 for taxes), but it saves you $6000 in taxes owed.

$18K pre-tax contribution to what kind of account? He can't do a pre-tax contribution to an IRA with a $300K income. The phase out is much lower than that. Even if he could, the max is only $5500 for someone under 50, which I assume is OP's case since he is just starting his career.

He could contribute up to $18.5K to a 401K during 2018, but most corporate plans don't allow employee contributions for a prior year, and he says he did already contribute. If he hasn't maxed out that contribution, then it's worth talking to his HR benefits rep to see if there's any way to do that, but it's a real long shot. It's rare to allow this because they need to close the books and run all the non-discrimination tests and possibly even return some of the contribution he already made since he's a highly compensated employee, which, if it happens, will only add to his tax woes.

 

[pb4uski]

Yup... as a prevously highly compensated W-2 employee, there isn't much you can do other than max out 401k and HSA and grin and bear it.

That is part of why I retired... I was tired of paying more in federal income tax than the average family made each year... I know... nice problem to have and all that, but still frustrating.

 

[Stranger]

Thanks to all of the replies. I have maxed on the 401k (I should have mentioned that).

I was in a bit of panic when I saw what I owed this year... I was brainstorming ideas and honestly didn't even consider a penalty for over-withholding (I don't want to that, obviously). I'm just going to take the W-4 to HR next week and deal with this issue that way. I am young and dumb and looking for alternative solutions... in reality this is the right way to resolve the issue.


On a side note... I think that it is likely that I owe this much due to bonuses I achieved this past year. I worked a lot of extra days to get a jump start on my mortgage, which was gifted to me in "bonus pay". The tax implications are now catching up to me, sadly.

- Stranger

 

[LOL!]

Note that 2 months of 2019 are practically gone and there are only 10 months of paychecks left in 2019.

 

[MarieIG]

Thanks to all of the replies. I have maxed on the 401k (I should have mentioned that).

I was in a bit of panic when I saw what I owed this year... I was brainstorming ideas and honestly didn't even consider a penalty for over-withholding (I don't want to that, obviously). I'm just going to take the W-4 to HR next week and deal with this issue that way. I am young and dumb and looking for alternative solutions... in reality this is the right way to resolve the issue.


On a side note... I think that it is likely that I owe this much due to bonuses I achieved this past year. I worked a lot of extra days to get a jump start on my mortgage, which was gifted to me in "bonus pay". The tax implications are now catching up to me, sadly.

- Stranger

You are not dumb at all. Just a bit new to this. Yes, raise your withholding but going forward, if you keep earning like this, and investing, you are going to have to keep your eye on investment income as well, when calculating your taxes.