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Federal income taxes - how does ANYONE get this right?
Posted by: mattkime
Date: February 02, 2023 10:29AM
Last year I owed the feds about $3500 when I filed. TurboTax recommended I pay $2300 quarterly which sounds crazy and I never bothered to make sense of it. "Maybe you should give the gov and extra $5,700" was how I interpreted it. How about no. I don't mind paying a couple grand when I file my taxes as its sitting in my savings account.

THIS YEAR

Same income, although I suspect some shifted from me to my wife. Somehow less tax was deducted from payroll - probably because her income is less so it takes out less based on a percentage. We failed to pay 90% of this year's taxes due OR 100% of last year's taxes. PENALTY TIME! I think my wife worked more, otherwise we changed nothing. She works on a contract basis, on and off, not full time.

The penalty isn't a problem, but it bothers me. Its shattering my illusions of control. Also, the IRS basically says its your job to make sure you're paying the right amount of taxes which isn't trivial.

Apparently one can apply for a one time forgiveness of the penalty. I'll try to minimize any penalty now and keep that in my pocket in case I really mess up.

Going forward, I might make quarterly payments based on how much my wife is earning, based on how much I owed last year. Hey IRS, here's another grand. I won't bother with calculations, close counts here.







Edited 1 time(s). Last edit at 02/02/2023 10:31AM by mattkime.
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Re: Federal income taxes - how does ANYONE get this right?
Posted by: dk62
Date: February 02, 2023 11:02AM
Yes, with stable income this is usually not a problem, as the taxes withheld are at least as much as they were the previous year (assuming that year 0 withholding was correct).

But with a couple of sources of income that are not taxed at the same rate (spouse income or even variable bonus, where tax is withheld at flat 25% or so), the problems can occur. I usually figure out roughly how much I will owe in taxes after I receive the bonus and calculate additional withholdings to modify my W4. I also usually over-withhold as the interest on savings has been very low. I find modifying W4 easier as a one-time process than quarterly withholdings.
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Re: Federal income taxes - how does ANYONE get this right?
Posted by: Acer
Date: February 02, 2023 11:21AM
If you withhold at least 90% of LAST year's final tax liability, you are absolved of the penalty if you have under-withheld (or paid quarterly). But you can't get away with it twice in a row.

I prefer to owe at tax time, so i always run lean on withholding. We had some significant changes in credits and income this year. Luckily I took the time to check on things in August. I discovered we were going to be significantly under-withheld. I made some big changes in withholding and pre-tax 401K contributions. It made our payroll person look at me funny, but I had to do it to avoid an ugly surprise in April.
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Re: Federal income taxes - how does ANYONE get this right?
Posted by: mattkime
Date: February 02, 2023 11:23AM
>I discovered we were going to be significantly under-withheld.

How did you calculate that?
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Re: Federal income taxes - how does ANYONE get this right?
Posted by: archipirata
Date: February 02, 2023 11:32AM
It can be tricky to make sure you pay enough throughout the year without paying way too much when you have multiple sources of income.

I have managed to avoid having to pay quarterly taxes or penalties on my side business income by having more held out at my regular job.

But I have to readjust every year to make sure I hit at least 100% of the previous year's total tax due.

It's worked well so far. Always comes out almost exact and don't have to bother with quarterlies.



Athens, OH
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Re: Federal income taxes - how does ANYONE get this right?
Posted by: Acer
Date: February 02, 2023 11:36AM
Quote
mattkime
>I discovered we were going to be significantly under-withheld.

How did you calculate that?

Simple spreadsheet. Forecast my income and expected tax liability using the previous 8 months applied to the last 4, then used pay stubs to see how things were looking for withholding.

Ours is wage income mostly. Commission people or self-employed it's gotta be nuts to get it right.
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Re: Federal income taxes - how does ANYONE get this right?
Posted by: Speedy
Date: February 02, 2023 11:59AM
You can always have your payroll provider withhold all your pay for taxes for the last month or two rather than throughout the year. Make it so you get a small refund and you’re golden. This does not work for estimated tax payments but it does for payroll withholding.

I have had to do this once in the distant past when I my business collected on a large judgment and it worked as slick as can be to have my wife’s withholding be her entire paycheck for November and December. If the collection had been a month later I would have had to scramble. If your employer is willing, you can write them a check to withhold more than the entirety of your pay.



Saint Cloud, Minnesota, where the weather is wonderful even when it isn't.
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Re: Federal income taxes - how does ANYONE get this right?
Posted by: Forrest
Date: February 02, 2023 01:00PM
It’s best to adjust to and complete a new W4 to adjust your withholding after you complete your taxes.

Warning - since there was a large increase in inflation for the past two years, the IRS has adjusted its tax tables to withhold LESS taxes from your paycheck! You can see this change in your paystub at the beginning of the year.

You’ll need to account for two years of tax increases when you complete the W4
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Re: Federal income taxes - how does ANYONE get this right?
Posted by: gabester
Date: February 02, 2023 01:37PM
Quote
Speedy
You can always have your payroll provider withhold all your pay for taxes for the last month or two rather than throughout the year. Make it so you get a small refund and you’re golden. This does not work for estimated tax payments but it does for payroll withholding.

Huh. I did not realize this was a possibility, but it seems like an excellent hack.

I can relate with mattkime about the frustration of computing taxes and underpaying on withholdings and then having to complete the penalty. However, that said, if you think of the the "penalty" for underpaying taxes as the easiest 5% loan you can ever take out, you can leave it to the IRS to compute your penalty for you. A couple times in the past few years withholdings haven't kept up with tax due based on income changes... last year I was expecting to pay a penalty but then because of a miscalculation due to 2020/21 pandemic aid and whatnot I ended up getting a modest refund (like $200) off the large check I sent in (like, almost 5 figures...)

Oh one other thing to note is that I think you're pretty much always golden so long as you made more money last year than the prior year, when it comes to filing taxes. But you get into trouble and can expect to be hit with a penalty if you didn't make that 90% mark from the prior's years taxes IF you made less money last year than the year before and end up owing a lot.



g=



Edited 1 time(s). Last edit at 02/02/2023 01:40PM by gabester.
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Re: Federal income taxes - how does ANYONE get this right?
Posted by: Michael
Date: February 02, 2023 04:16PM
For years I've used the current TurboTax to put together an anticipated tax return for the following year. I take our completed return and save it as "Anticipated 20XX taxes." I change salaries to reflect raises (now SS and pensions), and add and subtract things that will be different from the previous year. OF course investment income will vary. But, it's always been pretty accurate. Back when we worked I used it to adjust withholding (and then changed those numbers in the anticipated return). We do all of our taxes as estimated payments since we retired so I know what to pay quarterly; I always underpay the last estimated tax by a couple hundred dollars so we'll owe the IRS come tax time. This works great until there's a big change in the tax code. Then I have to do additional figuring.
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Re: Federal income taxes - how does ANYONE get this right?
Posted by: mspace
Date: February 03, 2023 08:58AM
Total freelancers here. I ignore the W2 income and auto deduct 30% from 1099 income (5% state/25% fed) to savings, filing quarterly for that. Usually works out fine.
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