Problem with withholding taxes, help with W-4!!

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tapotti
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Problem with withholding taxes, help with W-4!!

Post by tapotti » Mon Oct 30, 2017 12:25 pm

Hi all,

My wife and I are both physicians in the great state of California. We completed training in June, so our income for the first half of this year is obviously much different than the second half.

I was doing some calculating last night and concluded that we are both under withholding taxes from our w-4. We both have 0 allowances selected, but we have not been withholding extra. With income levels hard to predict, I didn't make a great effort to estimate extra wittholding at our new jobs.

Anyways, using Federal w-4 form worksheet, I discovered I needed to withhold an extra $16,080 over the course of a year. I didn't do that; so should I call my employer and just withhold that amount over the next two months?

My second question is regarding my wife. If she filled out the form, I would assume hers would also read $16,080 since our data is the same. Does that mean she also needs to withhold that amount over the next two months? That would be kinda brutal :annoyed

This same issue will apply to our California state taxes as well.

Thanks for the assitance!

mega317
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Re: Problem with withholding taxes, help with W-4!!

Post by mega317 » Mon Oct 30, 2017 12:48 pm

Something seems off here. Are you sure that with only 6 months as attendings you will owe 32k on top of what you're already withholding? My two physician household would owe about 45k total if we didn't itemize. We probably make a lot less than you though.

1. What did you use when you were doing your calculations?
2. Is your income that hard to predict? It's almost November.

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Pajamas
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Re: Problem with withholding taxes, help with W-4!!

Post by Pajamas » Mon Oct 30, 2017 12:51 pm

Can you make state and federal estimated tax payments instead of adjusting your withholding for this year?

The W-4 worksheet is very inaccurate in my experience. It is best to estimate your tax liability using tax preparation software if you can't estimate it from your prior tax returns because they aren't comparable.

You probably don't want to withhold too much and then get a large refund or credit since your income will presumably be even higher next year.

tapotti
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Re: Problem with withholding taxes, help with W-4!!

Post by tapotti » Mon Oct 30, 2017 1:01 pm

I estimate our total taxable income for this year to be around $390k. According to my excel sheet, up to right now, we have paid $50,518 in federal taxes. Depending on the calcuator you use, we will owe at least 100k (maybe closer to 110k?) in federal tax at the end of the year.

Without getting too complicated, it was reasonably hard to predict since my wife's start date was always moving. But now that she finally started (in October), and I have a better way to estimate our year end total, that brings me to my current situation.

I will likely itemize deductions this year since our state taxes will outweigh the standard deduction.
Last edited by tapotti on Mon Oct 30, 2017 1:06 pm, edited 1 time in total.

tapotti
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Re: Problem with withholding taxes, help with W-4!!

Post by tapotti » Mon Oct 30, 2017 1:03 pm

In response to Pajamas,

Yes, I would definitely be open to making my own payments. I've never done that before though. Is that something I can just do online?

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neurosphere
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Re: Problem with withholding taxes, help with W-4!!

Post by neurosphere » Mon Oct 30, 2017 1:05 pm

tapotti wrote:
Mon Oct 30, 2017 12:25 pm
Anyways, using Federal w-4 form worksheet, I discovered I needed to withhold an extra $16,080 over the course of a year. I didn't do that; so should I call my employer and just withhold that amount over the next two months?
I believe that the total "extra" withheld only applies to one W4. At least, that's how I read the instructions on the form, which imply to use only one worksheet:
Two earners or multiple jobs. If you have a
working spouse or more than one job, figure the
total number of allowances you are entitled to claim
on all jobs using worksheets from only one Form
W-4. Your withholding usually will be most accurate
when all allowances are claimed on the Form W-4
for the highest paying job and zero allowances are
claimed on the others. See Pub. 505 for details.
Regardless, what I suggest is doing a dummy set of taxes (ok to use 2016 software) to estimate your total 2016 taxes [edit upon preview post, seems like you did this]. Then, project your withholding to the end of the year, and figure out how short you will be on your taxes. Then, fill out a new W4 such that the extra amount is taken out by the end of the year.

Note that even though you may owe a substantial amount when you file in the spring, you may not owe any penalties/interest is you have met one of the safe harbor rules. So you may not be obligated to fill out a new W4 for this year. But you'll of course want to fill out the W4 correctly for 2018.
-- Real name: Sotirios Keros. If you have to ask "Is a Target Retirement fund right for me?", the answer is yes.

JW-Retired
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Re: Problem with withholding taxes, help with W-4!!

Post by JW-Retired » Mon Oct 30, 2017 1:06 pm

As long as you withhold 100% (or 110%) of your prior year tax owed, there won't be a penalty for not withholding enough. The 110% is if you have an AGI greater than $150k.
JW
Retired at Last

tapotti
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Re: Problem with withholding taxes, help with W-4!!

Post by tapotti » Mon Oct 30, 2017 1:11 pm

Interesting points.

It's great to avoid a fine, since I've certainly paid more in taxes this year already, but if I owe a good deal of money, it would be good to get a head start.

Of course, there is also the problem with our California state taxes, also underpaid. Not sure if their penalty system works exactly the same way, but it might.

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neurosphere
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Re: Problem with withholding taxes, help with W-4!!

Post by neurosphere » Mon Oct 30, 2017 1:30 pm

tapotti wrote:
Mon Oct 30, 2017 1:11 pm
Of course, there is also the problem with our California state taxes, also underpaid. Not sure if their penalty system works exactly the same way, but it might.
For California:
Generally, you must make estimated tax payments if you expect to owe at least $500 ($250 if married/RDP filing separately) in tax for 2017 (after subtracting withholding and credits) and you expect your withholding and credits to be less than the smaller of:

90% of the tax shown on your 2017 tax return; or
100% of the tax shown on your 2016 tax return including Alternative Minimum Tax (AMT).
Limit on the Use of Prior Year’s Tax
Individuals who are required to make estimated tax payments, and whose 2016 California adjusted gross income is more than $150,000 (or $75,000 if married/RDP filing separately), must figure estimated tax based on the lesser of 90% of their tax for 2017 or 110% of their tax for 2016 including AMT. This rule does not apply to farmers or fishermen.

Taxpayers with 2017 California adjusted gross income equal to or greater than $1,000,000 (or $500,000 if married/RDP filing separately), must figure estimated tax based on their tax for 2017.
https://www.ftb.ca.gov/individuals/faq/ivr/208.shtml
-- Real name: Sotirios Keros. If you have to ask "Is a Target Retirement fund right for me?", the answer is yes.

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giacomo_bogle
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Re: Problem with withholding taxes, help with W-4!!

Post by giacomo_bogle » Mon Oct 30, 2017 8:34 pm

For federal - I recommend you use the following link to determine your taxes at all times in the future

https://apps.irs.gov/app/withholdingcalculator/

For this year - if you at least withhold 110% of your previous years federal tax - which I assume you were still in residency (as MFJ last year), you will hopefully be good to go.
Rest can be paid when your taxes are due this year.

You will need to be careful for the next year; as long as you "withold" at least 90% of the taxes due from your W2 paychecks -you should be good!
This would likely mean that you will be withholding close to 1K extra between the 2 of you each biweekly pay period.
The IRS withholding calculator should help you out.

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CAsage
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Re: Problem with withholding taxes, help with W-4!!

Post by CAsage » Mon Oct 30, 2017 8:53 pm

Good thing you are looking at this now! One approach is to do a simulated or predicted tax return, and then make estimated payments for the W-4 shortfall based on that. Nominally the IRS wants them quarterly, and the CA wants them .... see below. You can easily find the due dates online, and the 1040ES/540ES form (really, really short) that you should sent with your payments. I know for sure you can arrange payments online with the CA FTB; you need to set up an account and they will transfer the money as you specify. I don't think you are really behind much (if at all) since your income jumped late in the year. You could also increase your withholding (divide the amount due by the remaining pay periods, add via W-4). And, congratulations on finishing training!

30 percent First quarter (April 18)
40 percent Second quarter (June 15)
0 percent Third quarter (September 15)
30 percent Fourth quarter (January 16)
Salvia Clevelandii "Winifred Gilman" my favorite. YMMV; not a professional advisor.

tapotti
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Re: Problem with withholding taxes, help with W-4!!

Post by tapotti » Tue Oct 31, 2017 12:47 am

Thanks for the replies!

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