Calculating Taxable income and withholding

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goodoboy
Posts: 406
Joined: Sat Nov 05, 2011 8:05 pm

Calculating Taxable income and withholding

How do I calculate taxable income to so i can play with the number to see if maxing out 401K to \$17.5K will decrease tax bill?

I am using http://www.wsu.edu/payroll/cgi-bin/withhold2013.cgi to calculate withholding and http://turbotax.intuit.com/tax-tools/ca ... taxcaster/ to estimate 2013 tax bill.
Last edited by goodoboy on Fri Feb 01, 2013 2:57 pm, edited 1 time in total.

sscritic
Posts: 21858
Joined: Thu Sep 06, 2007 8:36 am

Re: Calculating Taxable income and withholding

What you withhold is irrelevant to what you pay in tax. You could withhold \$10 million a year or \$0 a year and your tax bill wouldn't change. Now if you withhold \$0 and don't pay estimated tax, you would probably owe a penalty, but that's not really a "tax" (it's a penalty on your tax, so it sort of is a tax, but your calculator won't show it to you anyway).

goodoboy
Posts: 406
Joined: Sat Nov 05, 2011 8:05 pm

Re: Calculating Taxable income and withholding

sscritic wrote:What you withhold is irrelevant to what you pay in tax. You could withhold \$10 million a year or \$0 a year and your tax bill wouldn't change. Now if you withhold \$0 and don't pay estimated tax, you would probably owe a penalty, but that's not really a "tax" (it's a penalty on your tax, so it sort of is a tax, but your calculator won't show it to you anyway).

So will increasing my 401K decrease my tax bill? I think so.

kaneohe
Posts: 4736
Joined: Mon Sep 22, 2008 12:38 pm

Re: Calculating Taxable income and withholding

I am not sure what is puzzling you......but when you contribute to your 401K, what you ordinarily might think of as your gross wages becomes another number which is sometimes called your federal gross income which is your gross less your 401K contributions (and perhaps other pretax items). Since that number is lower than your gross income, it will reduce your taxable income by the same amount. For the 1040, you report the federal gross, not the gross income.

dbr
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Joined: Sun Mar 04, 2007 9:50 am

Re: Calculating Taxable income and withholding

goodoboy wrote:How do I calculate taxable income to so i can play with the number to see if maxing out 401K to \$17.5K will decrease tax bill?

I am using http://www.wsu.edu/payroll/cgi-bin/withhold2013.cgi to calculate withholding and http://turbotax.intuit.com/tax-tools/ca ... taxcaster/ to estimate 2013 tax bill.
When I run taxcaster there is a window on the rhs that has an item called taxable income that is described as

"Your income after subtracting deductions and exemptions. The amount on which your taxes are calculated. Note: cetain taxable income (e.g. qualified dividends, long term capital gains ...) could be taxed at a different rate than standard tax table."

Are we missing something about your question?

If you take between \$0 and \$17.5K away from your taxable wages in taxcaster you answer the question you are asking.

2retire
Posts: 367
Joined: Wed Jun 13, 2012 9:00 am

Re: Calculating Taxable income and withholding

I'm not sure why you need the information and what you think you have to figure out.

Every dollar you put in your 401k reduces your tax bill. It is hard for them to tax a dollar they consider doesn't exist.

goodoboy
Posts: 406
Joined: Sat Nov 05, 2011 8:05 pm

Re: Calculating Taxable income and withholding

2retire wrote:I'm not sure why you need the information and what you think you have to figure out.

Every dollar you put in your 401k reduces your tax bill. It is hard for them to tax a dollar they consider doesn't exist.

Overall, I am basically trying to see how much money I need to save this year (2013) to pay my taxes next year. I know that contributing more to my 401K will reduce the amount, but I don't know by how much.

goodoboy
Posts: 406
Joined: Sat Nov 05, 2011 8:05 pm

Re: Calculating Taxable income and withholding

goodoboy wrote:
2retire wrote:I'm not sure why you need the information and what you think you have to figure out.

Every dollar you put in your 401k reduces your tax bill. It is hard for them to tax a dollar they consider doesn't exist.

Overall, I am basically trying to see how much money I need to save this year (2013) to pay my taxes next year. I know that contributing more to my 401K will reduce the amount, but I don't know by how much. I don't know how to calculate taxable income and withholding to use http://turbotax.intuit.com/tax-tools/ca ... taxcaster/ and play with numbers.

I can present my wife and I income and dependencies we use on our W-4 if needed.

kaneohe
Posts: 4736
Joined: Mon Sep 22, 2008 12:38 pm

Re: Calculating Taxable income and withholding

You can divide the problem into 2 parts:
1) Calculate the tax you owe for the whole yr. As ssc already mentioned this is not dependent on your withholding if you consider your withholding and what you pay in April next yr as the tax you owe for the whole yr. Just enter your income (net of 401K contributions) and deductions (if none, you get standard) and personal info into Taxcaster which calculates the tax for the whole yr. If you want to match your withholding to that so that you don''t have to pay anything in April, then divide the tax by the # of pay periods ......you'll have to adjust to account for past pay periods in Jan. Then use your withholding calculator to figure out see how many allowances give you that.........you can always add a fixed amount to withhold more if necessary.
Your payroll dept should be able to help you here and might be more accurate.

diasurfer
Posts: 1836
Joined: Fri Jul 06, 2007 8:33 pm

Re: Calculating Taxable income and withholding

Are you making the same salary this year as last?

Do you know your marginal tax bracket? Mine is 25%. If I contribute \$1000 more to 401k this year than last year, I will pay 1000*25% = \$250 less in Federal Income Tax than last year.

If I don't want to use last years numbers, the calculation is more involved. This is my case, but yours will probably be different. I take my salary plus my wife's plus interest income, and subtract what we contributed to flex medical, flex childcare, and 401k. This gives adjustable gross income (AGI). Then I subtract the deductions for mortage interest paid and charity contributions. Others may have additional deductions, while others might just take the standard deduction. And then I subtract exemptions for a family of 4. This gives my federal taxable income (FTI). The federal tax due (FTD) on my FTI in the 25% bracket is

FTD = (FTI - 67500)*0.25 + 9350

This will give you how much you will have to pay. How much you are withholding is another matter, as mentioned several times.

The educational thing to do is get a form 1040A and replicate your taxes from last year. Then you'll get what the tax software is doing, and can make your estimate for this year understanding how this works. But you're going to have to get into the details of your deductions. If you want the easy way out and everything is basically the same this year, go with my first suggestion.

goodoboy
Posts: 406
Joined: Sat Nov 05, 2011 8:05 pm

Re: Calculating Taxable income and withholding

diasurfer wrote:Are you making the same salary this year as last?

Do you know your marginal tax bracket? Mine is 25%. If I contribute \$1000 more to 401k this year than last year, I will pay 1000*25% = \$250 less in Federal Income Tax than last year.

.
Thank you for the help. I want the easy way out. Ok, lets forget about the withholding because that is confusing me.

So if my salary stays the same and the deductions, then I just use the formula
1000*25% = \$250 less in Federal Income Tax than last year.
?

In other words if I contribute \$10K more to 401K than last year, and I we are in the 25% bracket, I pay 10000*25% = \$2500 less in Federal Income Tax than last year?

So if this year, I owe the gov \$4500, I can approximate next year it will be about \$2000?

Thanks

goodoboy
Posts: 406
Joined: Sat Nov 05, 2011 8:05 pm

Re: Calculating Taxable income and withholding

dbr wrote:
goodoboy wrote:
Are we missing something about your question?

If you take between \$0 and \$17.5K away from your taxable wages in taxcaster you answer the question you are asking.
Yes, I can get the taxable wages part by subtracting whatever extra i contribute to 401K, but does the withholding remain constant?

diasurfer
Posts: 1836
Joined: Fri Jul 06, 2007 8:33 pm

Re: Calculating Taxable income and withholding

goodoboy wrote:
diasurfer wrote:Are you making the same salary this year as last?

Do you know your marginal tax bracket? Mine is 25%. If I contribute \$1000 more to 401k this year than last year, I will pay 1000*25% = \$250 less in Federal Income Tax than last year.

.
Thank you for the help. I want the easy way out. Ok, lets forget about the withholding because that is confusing me.

So if my salary stays the same and the deductions, then I just use the formula
1000*25% = \$250 less in Federal Income Tax than last year.
?

In other words if I contribute \$10K more to 401K than last year, and I we are in the 25% bracket, I pay 10000*25% = \$2500 less in Federal Income Tax than last year?

So if this year, I owe the gov \$4500, I can approximate next year it will be about \$2000?

Thanks
yes that's is basically correct, but you need to make sure you are in the 25% bracket, and that depends on your filing status (single, married, etc) and your taxable income (FTI in notation above). For example, you can't owe only \$4500 in federal taxes if you are married filing jointly and in the 25% bracket. If you're in 15% bracket, then your tax savings by contributing 10000 more is 10000*.15 = \$1500. It's hard to get away from needing to know your taxable income.

goodoboy
Posts: 406
Joined: Sat Nov 05, 2011 8:05 pm

Re: Calculating Taxable income and withholding

diasurfer wrote:
goodoboy wrote:
diasurfer wrote: yes that's is basically correct, but you need to make sure you are in the 25% bracket, and that depends on your filing status (single, married, etc) and your taxable income (FTI in notation above). For example, you can't owe only \$4500 in federal taxes if you are married filing jointly and in the 25% bracket. If you're in 15% bracket, then your tax savings by contributing 10000 more is 10000*.15 = \$1500. It's hard to get away from needing to know your taxable income.
We are married and combined gross of about \$125K, so we are for sure in the 25% bracket.

dbr
Posts: 26987
Joined: Sun Mar 04, 2007 9:50 am

Re: Calculating Taxable income and withholding

goodoboy wrote:
dbr wrote:
goodoboy wrote:
Are we missing something about your question?

If you take between \$0 and \$17.5K away from your taxable wages in taxcaster you answer the question you are asking.
Yes, I can get the taxable wages part by subtracting whatever extra i contribute to 401K, but does the withholding remain constant?
I think kaneohe answered that question. The gist of the answer is that you get to choose how much is withheld. You don't want to withhold too little as there is a penalty charged for that.

goodoboy
Posts: 406
Joined: Sat Nov 05, 2011 8:05 pm

Re: Calculating Taxable income and withholding

dbr wrote:
goodoboy wrote:
dbr wrote:
goodoboy wrote:
Are we missing something about your question?

If you take between \$0 and \$17.5K away from your taxable wages in taxcaster you answer the question you are asking.
Yes, I can get the taxable wages part by subtracting whatever extra i contribute to 401K, but does the withholding remain constant?
I think kaneohe answered that question. The gist of the answer is that you get to choose how much is withheld. You don't want to withhold too little as there is a penalty charged for that.
Thanks. Right now I have 6 dependencies on the w-4, I am trying to decide if I reduce down to 0 dependency will this increase my witholding so I don't owe so much at the end of the year. By going from 6 to 0 dependent, my pay check does not decrease much.

livesoft
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Joined: Thu Mar 01, 2007 8:00 pm

Re: Calculating Taxable income and withholding

goodoboy wrote:We are married and combined gross of about \$125K, so we are for sure in the 25% bracket.
Uh, no.

There is gross income, adjusted gross income, and taxable income. What's your taxable income?

Many folks with gross income of about \$200,000 are in the 25% bracket.
This signature message sponsored by sscritic: Learn to fish.

goodoboy
Posts: 406
Joined: Sat Nov 05, 2011 8:05 pm

Re: Calculating Taxable income and withholding

http://www.paycheckcity.com/calculator/ ... esult.html

when i run that it gives the withholding per pay check. here i can play with the # of Federal Allowances, to get the witholding and multiply by 26 (i get paid bi-weekly 52/2 = 26) for the year.

Then to get the wages I just , 98000 - 17500 = \$80500

From this I can now go to taxcaster to see how much tax I can approximate for 2013

goodoboy
Posts: 406
Joined: Sat Nov 05, 2011 8:05 pm

Re: Calculating Taxable income and withholding

livesoft wrote:
goodoboy wrote: What's your taxable income?
how do I calculate taxable income?

kaneohe
Posts: 4736
Joined: Mon Sep 22, 2008 12:38 pm

Re: Calculating Taxable income and withholding

Could be tho....... 25% bracket 72K+ to 146K+ for taxable income. If OP's AGI is 125K, std deduction/exemptions about 20K results in 105K taxable if no IRAs/401K /other adjustments. 35K in 401Ks would wipe out all the 25% space.
http://fairmark.com/general-taxation/re ... schedules/

kaneohe
Posts: 4736
Joined: Mon Sep 22, 2008 12:38 pm

Re: Calculating Taxable income and withholding

goodoboy wrote:
livesoft wrote:
goodoboy wrote: What's your taxable income?
how do I calculate taxable income?
http://www.irs.gov/pub/irs-pdf/f1040.pdf

start w/ form 1040 ...work from line 1 to line 43..........

kaneohe
Posts: 4736
Joined: Mon Sep 22, 2008 12:38 pm

Re: Calculating Taxable income and withholding

goodoboy wrote:http://www.paycheckcity.com/calculator/ ... esult.html

when i run that it gives the withholding per pay check. here i can play with the # of Federal Allowances, to get the witholding and multiply by 26 (i get paid bi-weekly 52/2 = 26) for the year.

Then to get the wages I just , 98000 - 17500 = \$80500

From this I can now go to taxcaster to see how much tax I can approximate for 2013
Doesn't sound right.......why don't you start with 125K and list all the things that get you down to 80.5K besides the 401K 17.5K

goodoboy
Posts: 406
Joined: Sat Nov 05, 2011 8:05 pm

Re: Calculating Taxable income and withholding

Thanks everyone, but I give up. Sending more to 401k will reduce my tax bill and that's all I need to know. By how much, i have no idea. i will see next year at tax time. . I will run my taxes for 2012 and whatever I owe this year, i will just subtract about \$1500 from it and call it a day. Whatever the difference thats my tax bill for next year.LOL

my eyes hurt.

Peter Foley
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Location: Lake Wobegon

Re: Calculating Taxable income and withholding

Based on your gross income, you are likely to have a taxable income that puts you into the 25% bracket with some room to spare. Without working out the numbers, some of your 401K will reduce your taxes at the 25% rate and perhaps some at the 15% rate. Why not do your withholding estimates at the 20% reduction rate? That might give you a bit larger tax refund (if all your 401k is within the 25% bracket), but that's no big deal.

Example: Increase 401K by \$10,000 will reduce taxes by \$2,000. Adjust withholding accordingly.

grabiner
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Location: Columbia, MD

Re: Calculating Taxable income and withholding

Peter Foley wrote:Based on your gross income, you are likely to have a taxable income that puts you into the 25% bracket with some room to spare. Without working out the numbers, some of your 401K will reduce your taxes at the 25% rate and perhaps some at the 15% rate. Why not do your withholding estimates at the 20% reduction rate? That might give you a bit larger tax refund (if all your 401k is within the 25% bracket), but that's no big deal.

Example: Increase 401K by \$10,000 will reduce taxes by \$2,000. Adjust withholding accordingly.
There is no need to adjust your withholding, because the withholding is based on your W-2 salary, and the 401(k) contribution will decrease that salary. If you make \$100,000, the withholding is based on \$100,000 of income (reduced by any allowances you claim). If you contribute \$10,000 to a 401(k), then your withholding will be based on \$90,000 of income, so you will have \$2500 less withheld.

You need to adjust your withholding if there is a change to your taxable income that is not reflected on the W-2. For example, if you contribute to a deductible IRA, or add a baby, or make a large donation to charity, or buy a house and pay a lot of mortgage interest, you will need to claim more withholding allowances in order to avoid getting a large refund. If you sell stock for a capital gain, or refinance your mortgage and pay less in interest, or lose a dependent, you wil need to claim fewer allowances in order to avoid owing tax (and possibly a penalty for not having enough withheld).
David Grabiner

Hexdump
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Re: Calculating Taxable income and withholding

Do you use TurboTax or some such to do your taxes ?
If you do, and not too much has changed, then do 2011 again and fiddle with the 401k contribution and see what the difference is.
Save the return with a different name, like 2012 pro forma.

That's what I do to see if I will need to make estimated tax payments.

grabiner