Tax season is beginning and already I'm seeing posts where a spouse starting work on taxes enters one W-2 into tax software and sees a promising "refund" number displayed before all information has been added. Then after adding the other spouse's W-2, there's a disappointing nose-dive of the "refund" number. Confusion ensues about whose withholding is wrong and whether settings at the second spouse's workplace need to be fixed.
tldr: This is an outcome of misinterpreting interim numbers displayed by tax software before you've entered all information.
I've written a parable below that examines why it happens, in the hopes it will ease marital discord about it, and prevent people from taking actions that aren't warranted as a result of buying into this illusion.
Suppose a husband and wife make 60K and 30K, respectively. They file married jointly.
Here is one fact: The tax on married filers with 90K income is 7484.
Suppose they see this and decide it makes sense to arrange things so husband withholds 5000 and wife withholds 2500. Together they pay in 7500, so they won't owe at tax time. They decide it seems fair for them to divide the tax in this 2:1 ratio because their incomes are in a 60:30 ratio.
Would you agree that if they arrange their withholding so 5000 and 2500 are taken out of their paychecks, they are in good shape? Neither spouse would criticize the other's job as not taking enough tax out of paychecks, right?
Suppose everything goes as planned and they do have 5000 and 2500 of withholding. They have actually overpaid their tax by 16, so they'll get a small refund.
Let's look at what happens when the husband sits down with his tax software, TwerpoTax.
A few facts need to be stated about our tax system.
- The tax on a married couple with just 30K income is 560.
- The tax on a married couple with just 60K income is 3884.
- The tax on a married couple with 90K income is 7484.
If you are surprised that those numbers don't add up, you can verify it by learning how the standard deduction and tax brackets shape the tax owed.
So husband fires up TwerpoTax and enters his W-2 form in. His wages are 60000 and his withholding was 5000.
TwerpoTax sees the income is 60000 and filing status is Married Filing Jointly. It thinks the tax is 3884 but he has paid 5000.
"Your Refund Is $1116," TwerpoTax says.
Husband is happy and excited about his refund.
Then he adds wife's W-2 next. Her wages are 30000 and her withholding is 2500.
"Your Refund Is $16," says TwerpoTax.
Womp womp. Husband gets mad at wife because he thinks he has lost $1100 of "his" refund. "My refund is paying for some kind of mistake in her withholding setup," he thinks, grumbling. She better fix things at work, he decides.
Wife tries to explain to dear hubby that they still have overpaid, and are getting 16 back as a refund, so it can't be that their withholding is wrong.
Wife decides to try another approach. She sits down in front of TwerpoTax and erases what husband did. She starts fresh by entering her W-2 first.
Recall, she had 30000 wages and had 2500 of withholding. But TwerpoTax knows the tax tables and thinks tax for them is 560.
"Your Refund Is $1940," says TwerpoTax.
Wife turns to husband and says, "See? The software thinks I hugely overpaid my withholding. I didn't. My withholding was fine."
Wife adds husband's W-2 second. This adds 60000 income and 5000 withholding.
"Your Refund Is $16," says TwerpoTax, just as before.
"Should I say there must be something wrong with your withholding, dear husband?"
"After all, it looks like I have 'lost' $1924 of refund."
Wife says it doesn't matter which order they enter their W-2s in. They have paid their taxes correctly, even proportionally.
The software is just reporting wacky numbers in the middle because it knows how tax is calculated on smaller incomes and it doesn't yet know about the second income. The fact that tax on 30K alone and tax on 60K alone are not numbers that add up to tax on 90K makes it quite possible that no matter who puts their W-2 in first, it will seem like that person is due for a big refund. It's not so. It's just an outcome of entering the information partially and attributing meaning to the interim result.
Don't get me wrong: I am not saying it's never necessary to change withholding settings. I know married filers can sometimes underpay unless they take steps to fix their W-4 settings. But in a case like this, it's unjust for the husband to ask wife to increase her withholding.
It would technically be possible to arrange their withholding so husband would not see any disappointing drop in a fake refund number. He could arrange to have 3900 in withholding and ask wife to boost her withholding to 3600, even though she earns half what he does. Then if he used TwerpoTax and put his W-2 in first, it would say refund is $16, and when he adds wife's W-2 it would say refund is $16 still. But that's an unfair solution to wife.
Of course, wife could rebut that suggestion. She could say instead she will set her allowances so she has only 576 in withholding, and ask husband to increase his withholding to 6924. Then if she sits down to TwerpoTax and puts her W-2 in first, it'll say refund is $16, then after adding his W-2 it'll still say refund is $16.
My point is either of those is a silly reaction, trying to eliminate the fake refund display. Instead, they should just ignore the interim display.
I deliberately wrote this using a scenario where the couple actually has overpaid and is getting a refund, to demonstrate that the illusion of a "refund" drop can happen even when your withholding is correct. If your combined withholding is incorrect, and you learn you really have underpaid, it's worth taking steps to have your withholding be a correct total amount next year. But the answer isn't necessarily that the second person's withholding is wrong. Use the www.irs.gov/w4app tool to figure out the best result to improve next year's outcome.
Submitted January 26, 2019 at 10:03AM by wijwijwij http://bit.ly/2DAy14X
