Determining Correct Federal Income Tax Liability/Withholding

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Prov227
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Location: Milwaukee, WI

Determining Correct Federal Income Tax Liability/Withholding

Post by Prov227 » Sun Feb 11, 2018 5:15 pm

I was surpised to learn that I owed $2,000 when I sat down to prepare my 2017 taxes. Earlier in the year, I thought I was doing the right thing by changing my W-4 to "Married" status (after years of not realizing it was still "Single"). I changed to Married with 1 allowance for "yourself". This matched what was set up for DW. I guess I should have paid more attention to the $400 /mo decrease in withholding. Thus, owing $2,000 instead of the usual ~ $1,000 refund.

So, now I set out to make sure I'm in better shape for 2018. There are two complications that make this more difficult than just adjusting based on last year's results. (1) Different calculations for the new tax plan, and (2) in 2018, DW and I have gone from contributing just 4% to 401(k) to now maxing out.

I was hoping I could lay out the following situation and get input that my understanding and conclusion seem right. Luckily, our situation is pretty simple, I think.

120,000 - Income (after taking out contributions for 401(k) and health insurance)

10,000 - Deduction #1 (charitable giving)
5,000 - Deduction #2 (property tax)
9,000 - Deduction #3 (state income tax)
0,000 - No mortgage interest to deduct
0,000 - No more deduction for personal exemption? Eliminated in new plan?
-----
24,000 - Total Deductions (coincidentally, I believe this happens to be the new Standard Deduction for married status?)

96,000 - Taxable income

This is where I could be off, determining tax liability...
(source: https://taxfoundation.org/2018-tax-brackets/)
8,907 - Filling up the first two buckets of new tax bracket (10% of 19,050 + 12% of (77,400-19,050))
4,092 - 22% of the excess over 77,400
-----
12,999 - Total tax liability for 2018 ... Am I accurate in determining this number??

9,500 - Looking at Feb 1 paystubs for DW and me (with new plan being taken into account by payroll), we would be on pace to only have 9,500 withheld through payroll.

So, we are on pace to be 3,449 short!? Anything I'm doing wrong in this analysis?

Thank you.
"...and the borrower is slave to the lender." -Proverbs 22:7

kaneohe
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Re: Determining Correct Federal Income Tax Liability/Withholding

Post by kaneohe » Sun Feb 11, 2018 5:54 pm

I didn't check your calcs in detail but the methodology looks correct. The easiest way to fix is to change your W4 withholding to take an additional amount that you specify per pay period (line 6, I believe). Then you know exactly what will be withheld rather than fooling around with changing exemptions.

feehater
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Re: Determining Correct Federal Income Tax Liability/Withholding

Post by feehater » Sun Feb 11, 2018 6:24 pm

Actually your property AND state income tax deductions are limited to $10k total so you'd only add up to $20k total itemized in which case you would indeed take the $24k standard deduction anyway.

Silk McCue
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Re: Determining Correct Federal Income Tax Liability/Withholding

Post by Silk McCue » Sun Feb 11, 2018 7:06 pm

Based upon stated assumptions your calculations are correct. To compare your tax obligation for 2018 to the prior tax law go to this website (it confirms your figures for this year given standard deduction.)

http://taxplancalculator.com/

Cheers

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FiveK
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Re: Determining Correct Federal Income Tax Liability/Withholding

Post by FiveK » Sun Feb 11, 2018 10:42 pm

Prov227 wrote:
Sun Feb 11, 2018 5:15 pm
12,999 - Total tax liability for 2018 ... Am I accurate in determining this number??
Yes.
9,500 - Looking at Feb 1 paystubs for DW and me (with new plan being taken into account by payroll), we would be on pace to only have 9,500 withheld through payroll.

So, we are on pace to be 3,449 short!? Anything I'm doing wrong in this analysis?
No.

If you both earn the same amount, having both W-4s set to "Single with 2 allowances" would be about right.

You could put your overall situation into the personal finance toolbox spreadsheet and then adjust withholding in cells Calculations!G59:H60 to get what you want.

If you do that, at the end of the year the numbers will be a little off due to withholding that has already occurred, but that should be manageable.

mega317
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Re: Determining Correct Federal Income Tax Liability/Withholding

Post by mega317 » Mon Feb 12, 2018 12:20 am

This is way off topic but if you donate 10k per year consider bunching several years worth so you can itemize periodically.

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CAsage
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Re: Determining Correct Federal Income Tax Liability/Withholding

Post by CAsage » Mon Feb 12, 2018 1:49 am

mega317 wrote:
Mon Feb 12, 2018 12:20 am
This is way off topic but if you donate 10k per year consider bunching several years worth so you can itemize periodically.
Implementation: Look into a Donor Advised Fund (Fidelity or others; I found the Vanguard balance and grant minimums too high for me) and donate $20,000 in even years and 0 in odd years (or something similar). You can then "grant" your usual donations annually. This allows you to itemize every other year (since your SALT is limited to 10K total).
Salvia Clevelandii "Winifred Gilman" my favorite. YMMV; not a professional advisor.

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verbose
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Re: Determining Correct Federal Income Tax Liability/Withholding

Post by verbose » Mon Feb 12, 2018 12:22 pm

The married status and the allowances worksheet (the first page of W4) assumes that only one spouse works and has only one job. If that were the case, then your withholding would be close to your tax liability.

You must use the two-earner/two-jobs worksheet on the second page of the W4.

For correct married withholding:
- Spouse with lower paying job claims 0 allowances
- Spouse with higher paying job claims all eligible allowances for the couple and completes the two-earner worksheet (which will reduce those allowances and possibly result in extra withholding)

This results in correct withholding if:
- Earned income is the same or rises through the year
- The correct amount is withheld for every pay period in the year (already not true, as it’s February)
- There are no gaps in employment or income drops during the year
- The other assumptions on the W4 (children, itemized deductions, unearned income), do not materially change

If any of that is NOT true, then you can estimate your taxes (as you’ve done), calculate how much withholding is needed and use publication 15 to calculate the allowances you need to claim. Pub 15 was not written for this purpose but the data is in there.

This is complicated by the lack of a 2018 W4 right now. You are allowed to file a 2017 W4, but it won’t be accurate. The method above (publication 15, which is available for 2018) will work.

Note that using single status for withholding is a stab in the dark. It may or may not result in accurate withholding. The closer you and your spouse’s incomes are to each other, the more the withholding, without the two-earner worksheet, will be too little.

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FiveK
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Re: Determining Correct Federal Income Tax Liability/Withholding

Post by FiveK » Mon Feb 12, 2018 1:11 pm

verbose wrote:
Mon Feb 12, 2018 12:22 pm
If any of that is NOT true, then you can estimate your taxes (as you’ve done), calculate how much withholding is needed and use publication 15 to calculate the allowances you need to claim. Pub 15 was not written for this purpose but the data is in there.

Note that using single status for withholding is a stab in the dark. It may or may not result in accurate withholding. The closer you and your spouse’s incomes are to each other, the more the withholding, without the two-earner worksheet, will be too little.
Given that the advice copied below effectively uses Pub. 15 to calculate the withholding as suggested above, it's not clear why one would characterize "using single status for withholding [a]s a stab in the dark."
FiveK wrote:
Sun Feb 11, 2018 10:42 pm
If you both earn the same amount, having both W-4s set to "Single with 2 allowances" would be about right.

You could put your overall situation into the personal finance toolbox spreadsheet and then adjust withholding in cells Calculations!G59:H60 to get what you want.

If you do that, at the end of the year the numbers will be a little off due to withholding that has already occurred, but that should be manageable.

Prov227
Posts: 39
Joined: Thu Apr 03, 2014 11:13 pm
Location: Milwaukee, WI

Re: Determining Correct Federal Income Tax Liability/Withholding

Post by Prov227 » Sat Mar 10, 2018 6:40 pm

Just wanted to say thanks to those that verified I was on the right track and provided input. Using the new IRS calculator that just came out in the past two weeks, I was able to confirm these numbers as well. I'll be submitting new W-4s based on the recommendation on the IRS calculator results page, which instructed DW and I to both claim Married, 0, and add extra withholding amounts of about $100 combined.

(And wouldn't you know it, an extra complication arose with DW picking up a 1099 side-gig here in 2018 to the tune of about $250 coming in per month. So, we'll actually make our extra withholding more like $130 or so to account for that.)

Thanks again for the help!
"...and the borrower is slave to the lender." -Proverbs 22:7

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