W4 sanity check

[saintsfan342000]

With about 3 months to go this calendar year, I did the ol' IRS withholding calculator and W4 assistant to try to end up with zero tax liability. Got some unexpected results on the W4s so looking for a sanity check from the bogleheads. I believe the odd result is due to the fact that we've nearly already hit our total federal tax obligation. So I imagine the calculator is attempting to get us to zero withholding the rest of the year. As you'll see below, the W4 for Job 2 doesn't make any sense to me. The dollar figure in 4(a) is massive and since 4(a) is for reporting add'l income, I don't see how this will result in no further withholding. Can anyone explain? Does this make sense?

Married filing jointly (both working)
1 dependent
Combined W2 income: $330K
Interest/dividends: ~$10K
Standard deduction
Maxing out 401Ks
$8K total towards a health plan and dependent care FSA
Total federal income tax (not including SS/Medicare) paid so far in 2023: $48K

Here's how it's instructing us to fill out the W4s:
Job 1
Step 1: Married filing jointly
Step 2: Blank
Step 3: Blank
Step 4: Blank

Job 2
Step 1: Married filing jointly
Step 2: Blank
Step 3: $23,400
Step 4(a): $59,800
Step (b-c): Blank

[FiveK]

Tried reproducing your results using the personal finance toolbox spreadsheet but ran into "more details needed" items. E.g.,
- How much does each earn (e.g., results differ if $165K each vs. $300K/$30K)?
- How much is interest vs. how much is qualified dividends?
- W-2 box 1 numbers do not include 401k contributions, nor FSA amounts. Is the $330K before or after those deductions?

Maybe you could try that tool and see what you get? Entering income, filing status, etc., is reasonably straightforward but the "amount already withheld" down in cell Calculations!I70 might not be noticed at first glance.

[Hyperchicken]

This looks straightforward enough for you to directly calculate your tax liability for the year, and see where you are with the withholdings relative to that figure.

[BlizzardPearl]

With about 3 months to go this calendar year, I did the ol' IRS withholding calculator and W4 assistant to try to end up with zero tax liability. Got some unexpected results on the W4s so looking for a sanity check from the bogleheads. I believe the odd result is due to the fact that we've nearly already hit our total federal tax obligation. So I imagine the calculator is attempting to get us to zero withholding the rest of the year. As you'll see below, the W4 for Job 2 doesn't make any sense to me. The dollar figure in 4(a) is massive and since 4(a) is for reporting add'l income, I don't see how this will result in no further withholding. Can anyone explain? Does this make sense?

Married filing jointly (both working)
1 dependent
Combined W2 income: $330K
Interest/dividends: ~$10K
Standard deduction
Maxing out 401Ks
$8K total towards a health plan and dependent care FSA
Total federal income tax (not including SS/Medicare) paid so far in 2023: $48K

Here's how it's instructing us to fill out the W4s:
Job 1
Step 1: Married filing jointly
Step 2: Blank
Step 3: Blank
Step 4: Blank

Job 2
Step 1: Married filing jointly
Step 2: Blank
Step 3: $23,400
Step 4(a): $59,800
Step (b-c): Blank

Job 1 W-4 would be for the one with the lower W-2. Job 2 W-4 would be for the one with the higher W-2. When Step 4(c) is blank or zero, it doesn’t mean no more withholding. It means no extra/additional withholding. If you filed the W-4 as they are, withholding will continue, but at the default rate based on the respective payroll numbers. In other words, the W-4 assistant is saying, based on your input, the default withholding through the rest of the year, when added to what’s already withheld, should be sufficient to match your 2023 tax liability with near zero tax refund/owed.

[clemrick]

The IRS calculator is not very accurate. The best way to estimate your tax is to fill out a return with one of the online services. It will be for 2023, but will give you a much better idea of where you are.

[saintsfan342000]

Job 1 W-4 would be for the one with the lower W-2. Job 2 W-4 would be for the one with the higher W-2. When Step 4(c) is blank or zero, it doesn’t mean no more withholding. It means no extra/additional withholding. If you filed the W-4 as they are, withholding will continue, but at the default rate based on the respective payroll numbers. In other words, the W-4 assistant is saying, based on your input, the default withholding through the rest of the year, when added to what’s already withheld, should be sufficient to match your 2023 tax liability with near zero tax refund/owed.

That is correct - Job2 is the higher earning job. But can you explain the large amounts the calculator is suggesting for Step 3 and 4(a) ?

Tried reproducing your results using the personal finance toolbox spreadsheet but ran into "more details needed" items. E.g.,
- How much does each earn (e.g., results differ if $165K each vs. $300K/$30K)?
- How much is interest vs. how much is qualified dividends?
- W-2 box 1 numbers do not include 401k contributions, nor FSA amounts. Is the $330K before or after those deductions?

Maybe you could try that tool and see what you get? Entering income, filing status, etc., is reasonably straightforward but the "amount already withheld" down in cell Calculations!I70 might not be noticed at first glance.

The income I listed was gross. It shakes out to $140K and 190K for the two earners. I can dig out last years returns for an exact number on dividends and interest. But if we just assume that we've already hit our tax obligation, how do the W4s as suggested by the IRS get us down to "zero" refund.

[FiveK]

Tried reproducing your results using the personal finance toolbox spreadsheet but ran into "more details needed" items. E.g.,
- How much does each earn (e.g., results differ if $165K each vs. $300K/$30K)?
- How much is interest vs. how much is qualified dividends?
- W-2 box 1 numbers do not include 401k contributions, nor FSA amounts. Is the $330K before or after those deductions?

Maybe you could try that tool and see what you get? Entering income, filing status, etc., is reasonably straightforward but the "amount already withheld" down in cell Calculations!I70 might not be noticed at first glance.

The income I listed was gross. It shakes out to $140K and 190K for the two earners. I can dig out last years returns for an exact number on dividends and interest. But if we just assume that we've already hit our tax obligation, how do the W4s as suggested by the IRS get us down to "zero" refund.

It is odd that the IRS program would have "made up" a number for both 3 and 4a. Might you have entered the number that it suggested for 4a?

The suggestion in the "toolbox" spreadsheet, "Use Step 3 to reduce and Step 4c to increase withholding," seems reasonable. In other words, do as Hyperchicken and clemrick also suggested and use the toolbox spreadsheet or any other tax estimation tool for your total tax liability, compare that to the amount already withheld and being withheld, and adjust the amount being withheld by Step 3 or 4c as appropriate.

It's possible that the IRS's suggestion, Step 3: $23,400, will reduce the withholding for the income covered by that W-4 by enough (while continuing to take the default withholding from Job #1) to get you to ~$0 refund. But if you aren't going to have $23,400 of "other income you expect this year that won’t have withholding" then GIGO (garbage in, garbage out) applies.

Are you familiar enough with Excel to give the toolbox a try? It appears to be the only one that explicitly Suggests W-4 entries, although given accurate estimates for income and knowing current withholding it shouldn't be too difficult to take it from there - but then again there is the confusing IRS output, so...?

[BlizzardPearl]

Job 1 W-4 would be for the one with the lower W-2. Job 2 W-4 would be for the one with the higher W-2. When Step 4(c) is blank or zero, it doesn’t mean no more withholding. It means no extra/additional withholding. If you filed the W-4 as they are, withholding will continue, but at the default rate based on the respective payroll numbers. In other words, the W-4 assistant is saying, based on your input, the default withholding through the rest of the year, when added to what’s already withheld, should be sufficient to match your 2023 tax liability with near zero tax refund/owed.

That is correct - Job2 is the higher earning job. But can you explain the large amounts the calculator is suggesting for Step 3 and 4(a) ?

Those numbers are calculated based on your input. Steps 3 and 4(a) are used to manipulate the payroll withholding formula to get to zero refund. Step 3 is used to adjust the taxes already paid and tax credits expected. Step 4(a) is used to adjust the value for the lookup table to get the per period withholding. A combination of the two is supposed to result in the proper withholding for the remainder of the year to get to zero refund.

As clemrick says, I don’t have enough experience with the IRS estimator to trust it completely. Although for the very few times I used it for clients, it turned out okay (after I added a fuzzy factor to account for unknown variables ).