Hi personalfinance, I'm a long-time follower of the subreddit and tonight I've found myself in a spot to finally ask for some advice. I apologize for the length of this post in advance, but if you manage to bear with me and have any advice or commentary, I am very thankful.
My spouse and I filed our taxes tonight and discovered that we owed a lot more than we expected, about $5000. Yes, we filed very early, but we have all of our documents and do not have a complicated tax situation so we just got it done.
- We live in California
- We do not have kids
- We do not own a home
- We do not have any investments beyond each employer-provided 401k and a Roth IRA that we did not contribute to last year
- We have a higher-yield savings account that generated about $300 in interest
- We paid a few hundred dollars of interest in student loans due to the COVID-19 deferment
- We are shooting for $0 owed and a $0 return
The reason I say "expected" is because we did discover that we were in a pickle a bit past halfway through 2020.
Federal Taxes
For most of last year I was making about $75k as an hourly employee working 4 days a week at 10 hours per day. I started working in that role in November 2019. Not long after starting I noticed that I was receiving 8 hours of regular pay and 2 hours of overtime (1.5x) each day, in addition to full days of holiday pay that fell on days I was not scheduled to work otherwise. Instead of thinking harder about this, I thought that was cool and enjoyed it; my spouse expressed that they didn't think that was normal but took my word for it to not worry (I know). Later on in the year I was called into a meeting with about 4 other coworkers in the same situation and my manager told us that this was not intended, but the company would not be asking for any repayment and that we should expect future paychecks to be decreased to their intended amounts. I was grateful that they didn't ask me to write them a check but naturally was concerned about my tax situation; I used the IRS withholding calculator for 2020 and it determined that to shoot for $0 owed, I should withhold an additional ~$230 per paycheck and my spouse should withhold an additional ~$100 per paycheck in federal taxes (amounts estimated based on my memory). Great, I modified our W4s and added that in. I do not recall what we were additionally withholding prior to this correction but I do know that we were shooting for $0 owed/returned. (EDIT: I'm realizing that we probably were not withholding anything additional prior to this, because I wouldn't have the same question that I detailed at the end of the post. We were probably just withholding whatever is automatically withheld by our employers.)
Then, in December 2020, I started a new job making $110k, plus a yearly 10% bonus, with a $10k signing bonus that was supposed to be paid out 90 days after starting. I figured that since I started in December and would receive 1.5 paychecks before the end of the year, I wouldn't bother using the calculator to create an accurate W4 and just submitted an unchanged W4 with no additional withholding. In my mind, whatever I owed would be minor given that I should have fixed most of my unpaid tax burden by increasing withholding at my former employer. My spouse did not change their withholding and continued to withhold ~$100 for the last month of 2020.
My signing bonus was unexpectedly paid out a few weeks into the new job and naturally fell into my 2020 income. Taxes were withheld from this (22% for federal, which agrees with what I read elsewhere online about how much bonuses are taxed, as well as other applicable taxes). I am unsure if this had an effect on how much we ended up owing in federal taxes, but my hunch is that it did.
Our federal taxes owed has come out to $2235, much higher than I expected given the adjustments that we made to our W4s to compensate for my stupidity.
State Taxes
After the shock that we were in because of our federal tax situation, we were dismayed to discover that we owe $2628 to the state of California in unpaid taxes. I had no idea where this came from as we followed California's DE-4 instructions very closely:
- I took 2 standard allowances for the both of us with no additional withholding
- My spouse took 0 allowances with no additional withholding
We discovered that my spouse paid $5 in California income tax for the entirety of 2020. Unbeknownst to both of us, the checkbox on their DE-4 stating that they are exempt from state income tax was checked since January of 2020. We can only conclude that while we were filling out the W4 when their company switched payroll systems that month, we weren't paying attention and checked that box. My spouse made $26.55 hourly for most of 2020 and then began making $65k salary in October 2020. No federal or state withholding adjustments were made with the new pay rate so they were still withholding the additional ~$100 federal per paycheck that was calculated to fix my own mistake described previously.
This was a mistake on both of our parts, a big one at that. We should have noticed this much sooner. We have corrected the problem now and they have only received 2 paychecks this month that have no state income tax withheld.
Where We Are Now
- We filed our taxes and are set to pay back what we owe. Based on the issues mentioned above, I have no reason to believe that the numbers are incorrect. We have a substantial emergency fund and will be fine shouldering this burden, though it may take a bit for the embarrassment to wear off. Payments have been scheduled for the new tax season start date of February 12 2021.
- We fixed the California DE-4 exemption checkbox, as mentioned.
Earlier this month I used the IRS withholding calculator with the first paycheck that we each received for 2021 to determine what our federal withholding should be to achieve $0 owed/returned. It determined that I should be withholding $208 additional per paycheck (up from the $0 that I withheld after transitioning to my new job but down from the ~$230 I was withholding at my old job), and that my spouse should withhold $73 additional per paycheck (down from the ~$100 that they were withholding). We both adjusted our W4s as such.
Tonight, after panicking at the unexpected owed taxes, I decided to go through the IRS withholding calculator again. Despite our increased withholding that we set based on the calculation from earlier this month, it estimates that we will owe $2040 in federal taxes at the end of the year. To owe $0, it says to:
- Set my additional withholding to $210
- Set my spouse' additional withholding to $74
Next to both of these numbers, it says "this is an amount of withholding over and above the standard withholding from each paycheck for this job if lines 3 through 4(c) of the Form W-4 were blank or zero." At the moment, line 4(c) is not blank or zero since we are withholding the additional $208 and $73 respectively. Those numbers are suspiciously close to the earlier numbers that were returned.
So my questions are:
- How much did the early bonus affect our tax burden?
- When considering my expected yearly 10% bonus, on the IRS withholding calculator, am I correct to check the box that says "My employer will withhold the appropriate taxes from this future bonus" since I do see that taxes are being withheld from my bonuses?
- Do we add the $210 and $74 returned by the calculator onto the additional withholding that we are already doing since the beginning of the month, effectively doubling our additional withholding? Am I interpreting and using this calculator correctly?
- How do we correct our state withholding for the two paychecks that my spouse has received this year with $0 state income tax withheld? Just take a guess at an additional amount of state withholding on a new DE-4?
Submitted January 27, 2021 at 01:57AM by oddball_spaghetti https://ift.tt/3iRhXyS
