Tax Slaughter

[EastWest Gal]

Solution: pay the tax and be delighted that it will be easy for you. Adjust your withholding, or, make quarterly tax payments to make up the difference in tax the coming years to avoid penalties. Many people who be envious of your income and tax problem. Just try to avoid penalties.

And since you’re here, in this forum, take the extra income, LBYM, and invest in an after tax portfolio. You will be looking at the FI part of FIRE earlier than many of us. And maybe help out good causes that mean something to you, as well.

 

[target2019]

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.

Wondering if OP's tax CPA mentioned this? Definitely needs to look closer at the situation. Having last year's tax prep in your own software is a benefit. Then you get to look and learn, especially with next year's estimated taxes.

 

[Maenad]

You are not dumb at all. Just a bit new to this.

Ditto. You'd laugh if you knew how old we were when we made our similar mistake.

 

[utrecht]

If you're using a CPA, why didnt you ask him this question instead of asking some strangers on the internet?

 

[target2019]

If you're using a CPA, why didnt you ask him this question instead of asking some strangers on the internet?

Strangers on the internet are real people too!

 

[38Chevy454]

$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.

I forgot about the limitation for higher income, good catch there. OP has done good with maxing out his pre-tax 401k already though, that was a good move. So my idea is a moot point.

 

[jazz4cash]

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

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.

Agreed! I'm not working anymore but when I did I always had additional $X withheld and was able to get very close to correct amount withheld using reverse calculation. DW always claimed zero exemptions. The formula for increasing exemptions for the higher earner just never worked for us even with nearly 100% W2 income. I can't understand how the W4 process "works" for the masses but so many only care about getting a refund and have little concept of actual taxes paid.

 

[scrabbler1]

My favorite W-4 withholding story was in my first year of working, in 1985. This was before the 1986 Tax Reform which greatly reduced the number of tax brackets.


I began working in July, after finishing college, so I would earn half of my annual salary but was being withheld as if I were working the whole year. This had me being severely over-withheld and I didn't want that to happen.


So, I made a trip to my payroll department and they handed me a copy of the withholding tables they use. Armed with a pencil, paper, and a calculator, I somehow figured out that if I entered a "12" for the number of exemptions (which was permitted without question at the time) it would get me very close to neither owing nor getting much back the following April. It put an extra $120 in each biweekly paycheck which was a lot when you consider I wasn't earning much back then.


When April rolled around, I completed my federal and state tax returns. One I owed and the other I got a refund, each under $100. That extra ~$1,600 I took home in the 1985 paychecks (instead of having to wait for refunds) went toward buying a car in early 1986, in cash, without needing a car loan.


But in early 1986, I had to put the W-4 exemptions back to a normal level (1 or 2), cutting my pay (although I got 2 raises by July to recoup some of it).

 

[Al18]

FYI, increasing your 401K contribution will lower your tax withholding, not increase it.

You should spend some time with your CPA to determine how to update your W-4.

 

[MarieIG]

DH and I both claim 0 exemptions; and have extra withheld each paycheck; and I send in additional State & Federal estimated taxes to be on the safe side.

 

[WWDog]

I had a similar problem when I started my second career getting a pension and pay. That year I did not owe any penalties but for successive years I set up a spread sheet to calculate quarterly tax payments to put me just below what I owe in taxes each year. Over time this has proved to be a good deal as I move money around which creates differences from year to year in my income and taxes owed. It also allows you to invest for a quarter what you would be paying the money you would be paying in withholding.

 

[dixter]

one other option would be to talk with your CPA and he/she can print you out the forms and you can pay your taxes quarterly... also tell your CPA that you have a choice in how if any penalty you may owe from last year... the option is either the CPA calculates it or let the IRS calculate it and send you a bill...
My understanding is the IRS will not be collection the penalty this year due to the confusion of the tax tables...

If you let the CPA calculate them then you will pay for it no matter... better to let the IRS tell you that you owe the penalty or not...

 

[catii]

$18K pre-tax contribution to what kind of account?

A good CPA can advise you on things like Health Savings Accounts. You can afford a GOOD CPA!

 

[copyright1997reloaded]

OP.
1) Modify your W-4 to do extra withholding so you have no April surprises.
2) Max out your 401K (as you are doing)
3) See if your employer offers a 409A plan. This is a non-qualified deferred compensation plan where you defer salary. The general rules are:
a) the amount deferred can be distributed (back to you or your estate) only in case of separation from service, a specific date, death, disability, change of control or "unforeseen emergency".
b)the plan cannot allow 'acceleration' , i.e advancement of the time or schedule of disbursements (with some exceptions)
c) Elections (by you) to defer compensation must be made by the beginning of the year, and generally you must also designation distribution (e.g. over how many years).

I was able to do this the last year+ while working at mega-corp, and the money has been distributed to me over the last 10 years. As I remember, FICA/medicare is taxed when earned, but the rest (federal, state) is deferred until distribution. In my case, the money was "invested" in a series of funds and I was distributed a considerable amount more than I deferred due to investment "growth". I put these in quotes because the funds come from the companies operating earnings (which is another risk - this is not a good plan if you think the payer has a good chance of bankruptcy). The mutual funds were actually rotational accounts.

So, if you think you have a high income (which you do) for which you want to spread the income over years after you leave (e.g. retire early), this is something to look into. In my case, I was able to spread the deferred comp over 10 years after I retired.

 

[VungTau]

My goal has always been to pay only what I have to and target to be tax neutral or owe the IRS a bit when I file. Any gains from 12k investing wouldn't be worth the headache of dealing with the IRS plus any penalties, etc.

 

[S103462]

Retired now, but when I was working, not only did I fill out a W-4 form to estimate the correct withholding, I would also enter my projected income and other tax-related information into my past year's TT tax preparation software just as a ballpark sanity check of my W-4 estimate. (It was a close enough estimate for government work.)

If I wanted to be really OCD about it, I'd put the current year's tax information (rates, brackets, etc.) into a spreadsheet and do the math myself. With that answer, then I would update my W-4 accordingly. At filing time, my estimates were always very close, +/- a very small margin.

 

[Toocold]

I'm looking at a 50k tax bill this year. I'll just pay it and move on.