Zero exemptions still not enough!

[jimbohoward69]

So, I'm doing some tax planning for the coming year. I have two sources of income (military pension and federal GS salary) and I claim "0" on both. Well, after projecting out (using current $ withheld on each), I will still owe almost $4,300! WTH?!

Please check my numbers:

Ordinary Income - $ 87,038 (Pension - $34K, Taxable salary - $53K)
Qualified Divs - $900
Charitable Deduction - ($300)

Adjusted Gross Income - $87,638
Standard Deduction - ($12,950)
Taxable Income - $74,688

Ordinary Income @ 10% - $10,275 ($1,028)
Ordinary Income @ 12% - $31,500 ($3,780)
Qualified Divs @ 15% - $900 ($135)
Ordinary Income @ 22% - $32,013 ($7,043)

Total Federal Tax - $11,986
Fed Tax Withholding - $7,698
Estimated Refund - $(4,288)

Seem right?

Someone explained to me a while back on why having two separate sources of income sort of "penalizes" you come tax time but I forgot the major points. I just don't understand why enough isn't taken out per pay period/each month to account for the ZERO exemptions.

I guess by being bumped up to the 22% bracket, having additional $ withheld is in my future for the time being? Or, because of such a large amount due, quarterly estimated payments instead of a per paycheck basis?

Don't get me wrong...my tax bill is my tax bill. I'm just glad that I started my planning early and didn't wait until summer.

 

[sengsational]

Doesn't the W4 allow for additional withholding?

 

[Montecfo]

The withholding tables can't and shouldn't reflect the taxability of non-wage income. If they did most regular wage earners would be even more over withheld than they are.

The solution is to add extra witholding on the W-4 as needed to cover your non-eage income.

When I was earning wages I did this a couple of times a year to dial my additional liability within $1000 dollars or to meet a safe harbor.

 

[COcheesehead]

I have a part time gig in retirement and when I filled out my W4 there were overly complicated instructions for taking into account additional incomes. Bottom line, just add an additional amount withdrawn from each check.
TurboTax and Dinkytown both have good tax planning tools to run scenarios to figure out how much extra you should withhold.

 

[sengsational]

I agree with COcheesehead...It's easier and more accurate to do your taxes with last year's software (the planner or just the software itself) using projected this year earnings, than fiddle with the W4. The latter requires reading and understanding and following a set of rules, where's the former is usually just tweaking the tax return you've already prepared, and the software manages the rules.

 

[Gumby]

That's how I've always done it - by adding an extra withholding dollar figure to my W-4.

 

[Montecfo]

There is a witholding calculator on Kiplinger (or used to be) if you want more precision on the witholding calc.

 

[cathy63]

... ​Someone explained to me a while back on why having two separate sources of income sort of "penalizes" you come tax time but I forgot the major points. I just don't understand why enough isn't taken out per pay period/each month to account for the ZERO exemptions.

I guess by being bumped up to the 22% bracket, having additional $ withheld is in my future for the time being? Or, because of such a large amount due, quarterly estimated payments instead of a per paycheck basis?

Don't get me wrong...my tax bill is my tax bill. I'm just glad that I started my planning early and didn't wait until summer.

You need to fill out new W4s. They haven't used exemptions for several years, so if you still have ones with zero exemptions, you're using an old method that doesn't work well for multiple income streams. Get the new form and take the time to fill it out accurately for both the job and pension and your future withholding will be very close to what you owe.

 

[mystang52]

As others have noted, the withholding exemptions are less important than the $$$ withheld. Back in my employment days I had additional $$$ withheld.

 

[jebmke]

Doesn't the W4 allow for additional withholding?

I think it used to. I frequently just went down to payroll and told them what number I wanted in total and they figured it out. Not sure if that works many places -- they worked for me. '

 

[Sue J]

I have a very part-time job. I always used SINGLE-0 for my withholding because it would withhold the most. All that changed in 2021. In the first half of the year the older system was used and they withheld Fed taxes. In the 2nd half of the year nothing was withheld for Federal. I called my employer and they said the way withholding works was changed and I should fill out a new form.

The new form is nothing like the old form. I'm the only one employed but DH has pension income, so mine should really have 12% withheld. I would do a flat amount every paycheck but my checks vary as I don't get paid for holidays or snow days.

It's just not as clear as it used to be. So far I've done nothing and I'm making up for it from other sources.

 

[target2019]

You can have some tax withheld from your monthly pension.

 

[Montecfo]

I think it used to. I frequently just went down to payroll and told them what number I wanted in total and they figured it out. Not sure if that works many places -- they worked for me. '

I think you can specify a number in ADP without doing allowances. I would expect the big payroll processors can do it. Your HR may not allow it. Mine was ok but then they reported to me.

 

[Out of Steam]

My wife and I made relatively equal salaries when we were both working, and married with zero dependents didn't result in enough tax withheld. We always had an extra withholding amount taken out of my pay.

The last W-2 I saw (my daughter's) had a different way to calculate withholding for a two income couple, but it wouldn't apply directly to one person with two major income sources.

 

[COcheesehead]

There’s a space at the end of the new W4 that you can include additional money to be withheld. It’s pretty easy. Just figure out how much more you want withheld, divide it by the number of pay periods and enter the amount.

 

[Venturer]

There’s a space at the end of the new W4 that you can include additional money to be withheld. It’s pretty easy. Just figure out how much more you want withheld, divide it by the number of pay periods and enter the amount.

^^^^^^^^^ This!

 

[ncbill]

Why is the OP not taking advantage of maxing out tax-deferrals ($20,500 plus $6,500 if 50 or older) to their TSP then if they want converting to Roth after they actually retire, most likely in a lower tax bracket?

 

[Gumby]

Why is the OP not taking advantage of maxing out tax-deferrals ($20,500 plus $6,500 if 50 or older) to their TSP then if they want converting to Roth after they actually retire, most likely in a lower tax bracket?

He is currently in the 22% bracket and cannot get to the 12% bracket even by maxing his tax-deferred and so cannot get to the zero percent capital gains treatment. I assume that he will get a federal pension and that when he retires, he will still be in the 22% bracket. It makes little sense to put money in tax-deferred at 22% now only to turn around and take it back out at 22% later. I'd contribute to a Roth instead and the balance to taxable.

 

[sakowitzm]

I'm going to take a shot at WHY withholding doesn't work out to be enough when there are two income streams. I'll probably be wrong, but you all will correct me. Which is fine.

Take an extreme situation.

Person A earns $120,000 a year; $10,000/month. When the payroll software determines how much to withhold, it will multiply $10,000 X 12, come up with $120,000, and do the correct thing.

Person B also earns a total of $120,000 a year. But Person B has 10 income streams, each at $12,000 for the entire year. That's $1,000/month. So the tax software "sees" annual income of $12,000 and withholds ZERO. Because it assumes standard deduction.

So both Persons have the same exact income, but Person A's withholding will be correct, and Person B's withholding will be $0.

 

[sakowitzm]

Another viewpoint on using W-4s. When I worked I NEVER relied on the W-4 calculations. How can one fairly simple form work for everyone? (Okay, it USED to be simple! I just looked at one; no longer the case.)

If I remember correctly, one could enter 99 deductions, and "99" was code for *don't withhold anything at all*. Then simply enter the ACTUAL total amount you want withheld with each paycheck, and voila!

 

[cathy63]

I'm going to take a shot at WHY withholding doesn't work out to be enough when there are two income streams. I'll probably be wrong, but you all will correct me. Which is fine.

Take an extreme situation.

Person A earns $120,000 a year; $10,000/month. When the payroll software determines how much to withhold, it will multiply $10,000 X 12, come up with $120,000, and do the correct thing.

Person B also earns a total of $120,000 a year. But Person B has 10 income streams, each at $12,000 for the entire year. That's $1,000/month. So the tax software "sees" annual income of $12,000 and withholds ZERO. Because it assumes standard deduction.

So both Persons have the same exact income, but Person A's withholding will be correct, and Person B's withholding will be $0.

Yes, that's roughly correct. The new W-4 solves the problem for Person B by calculating the correct amount to withhold from the job that pays the most so he doesn't have a big tax bill come April. The IRS' online estimator works quite well and is easy to use, but unfortunately it is down right now.

 

[NW-Bound]

Someone explained to me a while back on why having two separate sources of income sort of "penalizes" you come tax time but I forgot the major points. I just don't understand why enough isn't taken out per pay period/each month to account for the ZERO exemptions...

That's part of a progressive tax system.

Say, if you have two persons A and B, each earning $50K. They individually pay $x amount in taxes.

Now, if you have a person C earning $100K. Does C pay 2x? No, he pays more.

Each of your income sources computes the tax without knowing about the other source. Therefore, each withheld as if that were your sole source of income, and it was not enough.

 

[Geld ist Freiheit]

Every year I do a rough, dry run of my taxes on July 4th as that’s about half way through the year. I just double the YTD taxable earnings, fed tax withheld, dividends & interest etc... add in realized capital gains to date and see if it lines up.

If I’m under running, I take that amount, add a little to it for piece of mind, then divide by 13 for the number remaining paychecks and have that additional amount withheld via a W-4 adjustment.

Really only takes a few minutes. So far, it’s worked out pretty well.

 

[TheWizard]

I have a specified PERCENTAGE of each retirement income stream withheld for taxes.
My earliest stream, pension/annuity starting at age 63, has a lower percentage withheld since that flow is filling up the lower brackets.

My RMD monthly stream, which started this year, has 24% withheld since that's where all other income puts me.

Depending on how my 2022 taxes work out a year from now, I might lower that withholding to 23%, to meet my goal of being a few hundred dollars underwithheld at the end of each year...