Author Topic: Help with W-4 number of allowances (married dual income) (Read 17487 times)

jeromedawg

  • Handlebar Stache
  • *****
  • Posts: 2424
  • Location: Orange County, CA
Help with W-4 number of allowances (married dual income)
« on: February 07, 2015, 11:10:19 PM »
Hi all,

So I'm reviewing my (and my wife's) W4 and am curious as to, generally, what the suggested number of allowances should be. I ran through the IRS calculator and it says to claim 0 allowances for the both of us (we're at a combined $150k roughly in income I think, though I hope to lower that number next year).

Reading around online though, I see general advice and recommendations to claim at least one for each person and as much as two. I'm a bit confused.... what's the best/easiest/least confusing way to figure this stuff out? The IRS calculator is even confusing to follow!

MDM

  • Walrus Stache
  • *******
  • Posts: 7187
Re: Help with W-4 number of allowances (married dual income)
« Reply #1 on: February 07, 2015, 11:28:52 PM »
It appears you have a decent understanding already, but I'll offer
/ask-a-mustachian/w4-deductions-for-married-2-earner-family/msg517574/#msg517574 and
/ask-a-mustachian/exemption-from-federal-withholding-on-w4/ in case there are some nuances you haven't seen.

Yes, the IRS calculator is less accurate than one would like. Doesn't mean that it is wrong in your case, but take it with a few grains of salt.

The best way to do this is to use 2014 results, combined with projected changes in 2015, to determine the appropriate 2015 strategy. See /ask-a-mustachian/turbo-tax-vs-cpa/msg539186/#msg539186 for one specific approach, but the general strategy is what's important.

E.g., ~how much will you owe or receive this year for your 2014 federal and state taxes?

jeromedawg

  • Handlebar Stache
  • *****
  • Posts: 2424
  • Location: Orange County, CA
Re: Help with W-4 number of allowances (married dual income)
« Reply #2 on: February 07, 2015, 11:38:37 PM »
It appears you have a decent understanding already, but I'll offer
/ask-a-mustachian/w4-deductions-for-married-2-earner-family/msg517574/#msg517574 and
/ask-a-mustachian/exemption-from-federal-withholding-on-w4/ in case there are some nuances you haven't seen.

Yes, the IRS calculator is less accurate than one would like. Doesn't mean that it is wrong in your case, but take it with a few grains of salt.

The best way to do this is to use 2014 results, combined with projected changes in 2015, to determine the appropriate 2015 strategy. See /ask-a-mustachian/turbo-tax-vs-cpa/msg539186/#msg539186 for one specific approach, but the general strategy is what's important.

E.g., ~how much will you owe or receive this year for your 2014 federal and state taxes?

Thanks! Currently we owe over $7k in Federal and are expected to receive about $145 for state. I think I was penalized for underpayment and on top of that we had several dividends and cap gains I incurred while rebalancing my portfolio. I just ran another W4 Calculator via ADP and it was advising to claim 0 on the spouse's W4 who has the lower income while the highest earner claims all allowances as they were suggesting it tends to be more accurate this way.

johnny847

  • Magnum Stache
  • ******
  • Posts: 3199
    • My Blog
Re: Help with W-4 number of allowances (married dual income)
« Reply #3 on: February 07, 2015, 11:50:18 PM »
The only true way to figure this out is to project your tax liability, and then look up the withholding tables.

I have a blog post about it: https://fiby40.wordpress.com/2015/02/04/how-to-properly-fill-out-a-w-4-paycheck-withholding-formchan/

It will seem like a lot of work. But step through the process and you will fully understand how your taxes work (which also means you can do tax planning).

MDM

  • Walrus Stache
  • *******
  • Posts: 7187
Re: Help with W-4 number of allowances (married dual income)
« Reply #4 on: February 08, 2015, 04:21:28 PM »
The only true way to figure this out is to project your tax liability, and then look up the withholding tables.

I have a blog post about it: https://fiby40.wordpress.com/2015/02/04/how-to-properly-fill-out-a-w-4-paycheck-withholding-formchan/

It will seem like a lot of work. But step through the process and you will fully understand how your taxes work (which also means you can do tax planning).
+1

Nice blog post johnny847. We like having the spreadsheet to do the calculations, but that isn't strictly necessary.

johnny847

  • Magnum Stache
  • ******
  • Posts: 3199
    • My Blog
Re: Help with W-4 number of allowances (married dual income)
« Reply #5 on: February 08, 2015, 05:05:22 PM »
The only true way to figure this out is to project your tax liability, and then look up the withholding tables.

I have a blog post about it: https://fiby40.wordpress.com/2015/02/04/how-to-properly-fill-out-a-w-4-paycheck-withholding-formchan/

It will seem like a lot of work. But step through the process and you will fully understand how your taxes work (which also means you can do tax planning).
+1

Nice blog post johnny847. We like having the spreadsheet to do the calculations, but that isn't strictly necessary.

Thanks.

I just thought of a substantially easier way to get the W-4 numbers right: Just put down zero allowances the first time you fill it out. Then check your next paystub for the withholding amount. Subtract total withheld for the year from your tax liability, divide by how many paychecks remain, and that's how much you need withheld per paycheck for the rest of the year.
Then use allowances and/or the manual extra withholding box 6 to adjust the withholding to the required value.

I should update the post on this, I'll probably get to it in a day or two.

jeromedawg

  • Handlebar Stache
  • *****
  • Posts: 2424
  • Location: Orange County, CA
Re: Help with W-4 number of allowances (married dual income)
« Reply #6 on: February 08, 2015, 06:43:31 PM »
Thanks Johnny! Really informative stuff. I haven't read through the post yet but will do so soon. So far I've changed my wife's witholdings to 0. Do you think it's better, if on dual-incomes, to claim all allowances on the higher-earners paycheck though? Or should the both of us be claiming allowances on our individual W4s?

Bikeguy

  • Stubble
  • **
  • Posts: 116
  • Location: Ann Arbor, MI
Re: Help with W-4 number of allowances (married dual income)
« Reply #7 on: February 08, 2015, 06:47:10 PM »
Each allowance is worth $600. If you owe money, time to pay estimated taxes quarterly, unless cap gains are all in one quarter
If you're FI, why are you still selling days of your life? You only have so many, and if you have enough money, you're trading them for something you don't need.

johnny847

  • Magnum Stache
  • ******
  • Posts: 3199
    • My Blog
Re: Help with W-4 number of allowances (married dual income)
« Reply #8 on: February 08, 2015, 06:59:21 PM »
Each allowance is worth $600. If you owe money, time to pay estimated taxes quarterly, unless cap gains are all in one quarter
The worth of an allowance is dependent on your pay period. Also, there is no payroll period for which the allowance is worth $600. See page 43 in publication 15 irs.gov/pub/irs-pdf/p15.pdf

Thanks Johnny! Really informative stuff. I haven't read through the post yet but will do so soon. So far I've changed my wife's witholdings to 0. Do you think it's better, if on dual-incomes, to claim all allowances on the higher-earners paycheck though? Or should the both of us be claiming allowances on our individual W4s?
It really doesn't matter who pays how much in tax for a married couple filing jointly. The government taxes the couple as one entity. So you could pay all the tax through withholding, and your wife could pay nothing, and the IRS would be fine with that as long as your total combined withholding is an amount that doesn't result in underpayment of tax penalties.


Bikeguy

  • Stubble
  • **
  • Posts: 116
  • Location: Ann Arbor, MI
Re: Help with W-4 number of allowances (married dual income)
« Reply #9 on: February 08, 2015, 07:36:12 PM »
If you owe the IRS $600, raise your allowance by one and you won't owe anything the next year. It's a rule of thumb. I've done it and it worked for me.
If you're FI, why are you still selling days of your life? You only have so many, and if you have enough money, you're trading them for something you don't need.

johnny847

  • Magnum Stache
  • ******
  • Posts: 3199
    • My Blog
Re: Help with W-4 number of allowances (married dual income)
« Reply #10 on: February 08, 2015, 07:51:07 PM »
If you owe the IRS $600, raise your allowance by one and you won't owe anything the next year. It's a rule of thumb. I've done it and it worked for me.
I believe you mean claim one less allowance? You're phrasing it kinda funny. Raising your allowance by one would mean claim another allowance. Which would subject less of your income to tax withholding and make you owe more to the IRS come tax season.

Claiming one less allowance means you're subjecting another $4000 of your income to tax withholding (I actually didn't know this until I calculated it just now! I learn something new every day). This is because if you take the worth of each allowance under the different payroll periods, and multiply it by the number of paychecks you would receive, you get $4000.

For 2015, each allowance is worth:
Weekly: 76.9
Biweekly: 153.8
Semimonthly: 166.7
Monthly: 333.3
(and more payroll cycles which probably don't apply to most people -quarterly, semiannually, annually, and daily (??) ).

Notice how to within $1, 76.9/week * 52 weeks = 153.8/2 weeks * 26 bi weekly periods = 166.7/half month * 24 bimonthly periods = 333.3/month * 12 months = $4000.

Now you owed the IRS $600, and then decreased your allowance by one to owe nothing next year. If I had to hazard a guess, this worked for you only because you are in the 15% marginal tax bracket: $600/ $4000 = 15%.
But say somebody was in the 25% bracket. Then if they owed $600 in tax, lowering their allowance by one would subject $4000 to their marginal rate in withholding, meaning they would have an extra $1000 withheld. Resulting in a $400 interest free loan to the IRS (not that this is any substantial amount).
Point is, if you understand how paycheck withholding works, you can figure out how to get it right, without relying on rules of thumb.

jeromedawg

  • Handlebar Stache
  • *****
  • Posts: 2424
  • Location: Orange County, CA
Re: Help with W-4 number of allowances (married dual income)
« Reply #11 on: February 08, 2015, 09:15:59 PM »
Hey Johnny,

I'm trying to make a 'simple' Excel/Numbers calculator based off your post and am still a bit stuck/confused about this equation (for Monica/Chandler - haha @ the "Friends" reference :)):

Tax liability: $8242.50 [ ((76,900-0.8*3500)-18450)*0.15+1845 + 0*700)

I get the initial $8242.50 but not sure about the rest. Where did the "18450" come from? And what is the last part of the equation, 0*700 - isn't that just 0?
« Last Edit: February 08, 2015, 09:19:50 PM by jplee3 »

johnny847

  • Magnum Stache
  • ******
  • Posts: 3199
    • My Blog
Re: Help with W-4 number of allowances (married dual income)
« Reply #12 on: February 08, 2015, 09:27:39 PM »
Hey Johnny,

I'm trying to make a 'simple' Excel/Numbers calculator based off your post and am still a bit stuck/confused about this equation (for Monica/Chandler - haha @ the "Friends" reference :)):

Tax liability: $8242.50 [ ((76,900-0.8*3500)-18450)*0.15+1845 + 0*700)

I get the initial $8242.50 but not sure about the rest. Where did the "18450" come from? And what is the last part of the equation, 0*700 - isn't that just 0?
Haha yes Friends is my favorite show of all time!

I like using http://forbes.com/sites/kellyphillipserb/2014/10/30/irs-announces-2015-tax-brackets-standard-deduction-amounts-and-more/ for the tax tables.

They have 76900 - 0.8*3500 = 74100 of income subject to normal income tax rates. From the tax tables, that falls into the 15% bracket for MFJ. The tax owed on this is $1845 + 15% of the amount over $18450 (see the tax tables).

I have the 0*700 on there because I want to explicitly say that that they are paying no taxes on their qualified dividends. So actually, to make that point, that should've been 0*2800, not 700. But in the end, it's still zero.

MDM

  • Walrus Stache
  • *******
  • Posts: 7187
Re: Help with W-4 number of allowances (married dual income)
« Reply #13 on: February 08, 2015, 09:41:23 PM »
Hey Johnny,

I'm trying to make a 'simple' Excel/Numbers calculator based off your post and am still a bit stuck/confused about this equation (for Monica/Chandler - haha @ the "Friends" reference :)):

Tax liability: $8242.50 [ ((76,900-0.8*3500)-18450)*0.15+1845 + 0*700)

I get the initial $8242.50 but not sure about the rest. Where did the "18450" come from? And what is the last part of the equation, 0*700 - isn't that just 0?
Haha yes Friends is my favorite show of all time!

I like using http://forbes.com/sites/kellyphillipserb/2014/10/30/irs-announces-2015-tax-brackets-standard-deduction-amounts-and-more/ for the tax tables.

They have 76900 - 0.8*3500 = 74100 of income subject to normal income tax rates. From the tax tables, that falls into the 15% bracket for MFJ. The tax owed on this is $1845 + 15% of the amount over $18450 (see the tax tables).

I have the 0*700 on there because I want to explicitly say that that they are paying no taxes on their qualified dividends. So actually, to make that point, that should've been 0*2800, not 700. But in the end, it's still zero.

Something still seems amiss. Taking the equation at face value, one gets $10,192.50 for taxes:
((76,900-0.8*3500)-18450)*0.15+1845
((76,900-2,800) -18450)*0.15+1845
(74,100 -18450)*0.15+1845
( 55650 )*0.15+1845
8347.5 +1845
10,192.5

But because the AGI is above the 15% bracket, M&C have to pay $300 on their capital gains for a total of $10,492.50.

See attached spreadsheet. It's ~the same one in the How To Write a Reader Case Study, but with above entries added.




johnny847

  • Magnum Stache
  • ******
  • Posts: 3199
    • My Blog
Re: Help with W-4 number of allowances (married dual income)
« Reply #14 on: February 08, 2015, 09:54:21 PM »
Hey Johnny,

I'm trying to make a 'simple' Excel/Numbers calculator based off your post and am still a bit stuck/confused about this equation (for Monica/Chandler - haha @ the "Friends" reference :)):

Tax liability: $8242.50 [ ((76,900-0.8*3500)-18450)*0.15+1845 + 0*700)

I get the initial $8242.50 but not sure about the rest. Where did the "18450" come from? And what is the last part of the equation, 0*700 - isn't that just 0?
Haha yes Friends is my favorite show of all time!

I like using http://forbes.com/sites/kellyphillipserb/2014/10/30/irs-announces-2015-tax-brackets-standard-deduction-amounts-and-more/ for the tax tables.

They have 76900 - 0.8*3500 = 74100 of income subject to normal income tax rates. From the tax tables, that falls into the 15% bracket for MFJ. The tax owed on this is $1845 + 15% of the amount over $18450 (see the tax tables).

I have the 0*700 on there because I want to explicitly say that that they are paying no taxes on their qualified dividends. So actually, to make that point, that should've been 0*2800, not 700. But in the end, it's still zero.

Something still seems amiss. Taking the equation at face value, one gets $10,192.50 for taxes:
((76,900-0.8*3500)-18450)*0.15+1845
((76,900-2,800) -18450)*0.15+1845
(74,100 -18450)*0.15+1845
( 55650 )*0.15+1845
8347.5 +1845
10,192.5

But because the AGI is above the 15% bracket, M&C have to pay $300 on their capital gains for a total of $10,492.50.

See attached spreadsheet. It's ~the same one in the How To Write a Reader Case Study, but with above entries added.
UGH, I screwed this up. Yup you're right, they owe $300 of tax on their capital gains - nothing on the first $800 of qualified dividends, and then 15% on the next $2000 = $300. This is what I get for skipping steps unlike the Rachel example.

So it should be
((76900 - 0.8*3500) - 18450)*.15 + 1845 + (74900-(76900 - 0.8*3500))*0 + [2800 - (74900-(76900 - 0.8*3500))]*.15
10192.5 + 0 + 300


I'll fix this tomorrow and propagate the changes through the rest of the post (I'm actually procrastinating writing a paper at the moment =P)

jeromedawg

  • Handlebar Stache
  • *****
  • Posts: 2424
  • Location: Orange County, CA
Re: Help with W-4 number of allowances (married dual income)
« Reply #15 on: February 08, 2015, 11:43:05 PM »
One other question about the qualified dividends. Is there a particular reason why you figured what the percentage was and added that into the equation when the 1099-DIV tells you what the actual qualified dividend is in 1b? Also, it seems that the qualified dividends will always vary depending on what funds you've purchased (so it's not always going to be "20% of X" right?)

One other question about allowances between Federal and State. If you mark 2 allowances for Federal and 2 for State, this affects your Federal and State returns, respectively right? So if I withheld 2 on Federal and 0 for State then I should expect to receive more of a refund on the State return in general?
« Last Edit: February 08, 2015, 11:52:07 PM by jplee3 »

jeromedawg

  • Handlebar Stache
  • *****
  • Posts: 2424
  • Location: Orange County, CA
Re: Help with W-4 number of allowances (married dual income)
« Reply #16 on: February 09, 2015, 02:45:45 PM »
Based on my current calculations, it seems my tax liability falls anywhere between $15k-$21k depending on how dividends and capital gains from potential anticipated sales of stocks/mutual funds this year (let's assume $15k with no dividends/gains, an itemized deduction of $15k, and our personal exemptions of $8k combined). I was figuring the estimated Federal Income Tax between my wife and I for the year to be around $12500 if both of us claim 0 allowances.

Given the $15k "base" estimate, this means that I'll still owe $2500 in taxes (for Federal) even if I claim 0 allowances? Does that sound about right? I understand the CA withholding is a bit different and can also be deducted from Federal, but I haven't even gone there yet...


Also, how do you guys deal with bonuses and supplemental wages? I was reviewing the section in the IRS publication but am thoroughly confused on the payout I received and what I calculated.

johnny847

  • Magnum Stache
  • ******
  • Posts: 3199
    • My Blog
Re: Help with W-4 number of allowances (married dual income)
« Reply #17 on: February 09, 2015, 02:49:12 PM »
One other question about the qualified dividends. Is there a particular reason why you figured what the percentage was and added that into the equation when the 1099-DIV tells you what the actual qualified dividend is in 1b? Also, it seems that the qualified dividends will always vary depending on what funds you've purchased (so it's not always going to be "20% of X" right?)

One other question about allowances between Federal and State. If you mark 2 allowances for Federal and 2 for State, this affects your Federal and State returns, respectively right? So if I withheld 2 on Federal and 0 for State then I should expect to receive more of a refund on the State return in general?
That percentage of qualified dividends was completely arbitrary, it will as you said depend on the funds you invest in.

And yes about your question with federal and state.

johnny847

  • Magnum Stache
  • ******
  • Posts: 3199
    • My Blog
Re: Help with W-4 number of allowances (married dual income)
« Reply #18 on: February 09, 2015, 02:52:25 PM »
Based on my current calculations, it seems my tax liability falls anywhere between $15k-$21k depending on how dividends and capital gains from potential anticipated sales of stocks/mutual funds this year (let's assume $15k with no dividends/gains, an itemized deduction of $15k, and our personal exemptions of $8k combined). I was figuring the estimated Federal Income Tax between my wife and I for the year to be around $12500 if both of us claim 0 allowances.

Given the $15k "base" estimate, this means that I'll still owe $2500 in taxes (for Federal) even if I claim 0 allowances? Does that sound about right? I understand the CA withholding is a bit different and can also be deducted from Federal, but I haven't even gone there yet...


Also, how do you guys deal with bonuses and supplemental wages? I was reviewing the section in the IRS publication but am thoroughly confused on the payout I received and what I calculated.
It could be right. I honestly have no idea, considering I don't know how much wage income you expect.
The bigger the capital gains and dividends relative to your wage income, the more withholding you will need on your W-2's.

I haven't read in detail how the tax withholding is actually calculated for bonuses and supplemental wages (by the way, what exactly are supplemental wages?) but if I had to guess it would be based on your W-4 information. What does the IRS publication tell you?

jeromedawg

  • Handlebar Stache
  • *****
  • Posts: 2424
  • Location: Orange County, CA
Re: Help with W-4 number of allowances (married dual income)
« Reply #19 on: February 09, 2015, 02:57:14 PM »
Based on my current calculations, it seems my tax liability falls anywhere between $15k-$21k depending on how dividends and capital gains from potential anticipated sales of stocks/mutual funds this year (let's assume $15k with no dividends/gains, an itemized deduction of $15k, and our personal exemptions of $8k combined). I was figuring the estimated Federal Income Tax between my wife and I for the year to be around $12500 if both of us claim 0 allowances.

Given the $15k "base" estimate, this means that I'll still owe $2500 in taxes (for Federal) even if I claim 0 allowances? Does that sound about right? I understand the CA withholding is a bit different and can also be deducted from Federal, but I haven't even gone there yet...


Also, how do you guys deal with bonuses and supplemental wages? I was reviewing the section in the IRS publication but am thoroughly confused on the payout I received and what I calculated.
It could be right. I honestly have no idea, considering I don't know how much wage income you expect.
The bigger the capital gains and dividends relative to your wage income, the more withholding you will need on your W-2's.

I haven't read in detail how the tax withholding is actually calculated for bonuses and supplemental wages (by the way, what exactly are supplemental wages?) but if I had to guess it would be based on your W-4 information. What does the IRS publication tell you?

From what I'm reading in the publication, it says to add the bonus amount to the amount of the paycheck prior to it, factor in the allowances, and then proceed to using the tables as you normally would. Thing is, when I do this with 0 allowances, I get an estimated payout that's higher than what I'm currently getting back *with* allowances. So I'm pretty lost and confused. I'm sure I'm missing something (or several things)

MDM

  • Walrus Stache
  • *******
  • Posts: 7187
Re: Help with W-4 number of allowances (married dual income)
« Reply #20 on: February 09, 2015, 03:00:22 PM »
One other question about the qualified dividends. Is there a particular reason why you figured what the percentage was and added that into the equation when the 1099-DIV tells you what the actual qualified dividend is in 1b? Also, it seems that the qualified dividends will always vary depending on what funds you've purchased (so it's not always going to be "20% of X" right?)
I suspect the percentage was merely an assumption to add details to the example (and now see that's true!).

Quote
One other question about allowances between Federal and State. If you mark 2 allowances for Federal and 2 for State, this affects your Federal and State returns, respectively right? So if I withheld 2 on Federal and 0 for State then I should expect to receive more of a refund on the State return in general?
There are ~40 different ways state income taxes are done. Not 50, because some states have none, but there can be large differences from state to state. More to the point, there can be large differences (allowable deductions, etc.) between state and federal. It has not been uncommon for us to have different state vs. federal allowances yet expect similar results for net tax due at the end of the year.

jeromedawg

  • Handlebar Stache
  • *****
  • Posts: 2424
  • Location: Orange County, CA
Re: Help with W-4 number of allowances (married dual income)
« Reply #21 on: February 09, 2015, 03:01:46 PM »
One other question about the qualified dividends. Is there a particular reason why you figured what the percentage was and added that into the equation when the 1099-DIV tells you what the actual qualified dividend is in 1b? Also, it seems that the qualified dividends will always vary depending on what funds you've purchased (so it's not always going to be "20% of X" right?)
I suspect the percentage was merely an assumption to add details to the example (and now see that's true!).

Quote
One other question about allowances between Federal and State. If you mark 2 allowances for Federal and 2 for State, this affects your Federal and State returns, respectively right? So if I withheld 2 on Federal and 0 for State then I should expect to receive more of a refund on the State return in general?
There are ~40 different ways state income taxes are done. Not 50, because some states have none, but there can be large differences from state to state. More to the point, there can be large differences (allowable deductions, etc.) between state and federal. It has not been uncommon for us to have different state vs. federal allowances yet expect similar results for net tax due at the end of the year.

Perhaps I'm starting to come to the realization (and experiencing denial) that it's just expensive to live in California...LOL!

johnny847

  • Magnum Stache
  • ******
  • Posts: 3199
    • My Blog
Re: Help with W-4 number of allowances (married dual income)
« Reply #22 on: February 09, 2015, 03:04:37 PM »
Based on my current calculations, it seems my tax liability falls anywhere between $15k-$21k depending on how dividends and capital gains from potential anticipated sales of stocks/mutual funds this year (let's assume $15k with no dividends/gains, an itemized deduction of $15k, and our personal exemptions of $8k combined). I was figuring the estimated Federal Income Tax between my wife and I for the year to be around $12500 if both of us claim 0 allowances.

Given the $15k "base" estimate, this means that I'll still owe $2500 in taxes (for Federal) even if I claim 0 allowances? Does that sound about right? I understand the CA withholding is a bit different and can also be deducted from Federal, but I haven't even gone there yet...


Also, how do you guys deal with bonuses and supplemental wages? I was reviewing the section in the IRS publication but am thoroughly confused on the payout I received and what I calculated.
It could be right. I honestly have no idea, considering I don't know how much wage income you expect.
The bigger the capital gains and dividends relative to your wage income, the more withholding you will need on your W-2's.

I haven't read in detail how the tax withholding is actually calculated for bonuses and supplemental wages (by the way, what exactly are supplemental wages?) but if I had to guess it would be based on your W-4 information. What does the IRS publication tell you?

From what I'm reading in the publication, it says to add the bonus amount to the amount of the paycheck prior to it, factor in the allowances, and then proceed to using the tables as you normally would. Thing is, when I do this with 0 allowances, I get an estimated payout that's higher than what I'm currently getting back *with* allowances. So I'm pretty lost and confused. I'm sure I'm missing something (or several things)
Well it is within the realm of possibility that your employer is just not withholding the correct amount.

jeromedawg

  • Handlebar Stache
  • *****
  • Posts: 2424
  • Location: Orange County, CA
Re: Help with W-4 number of allowances (married dual income)
« Reply #23 on: February 09, 2015, 03:06:37 PM »
Based on my current calculations, it seems my tax liability falls anywhere between $15k-$21k depending on how dividends and capital gains from potential anticipated sales of stocks/mutual funds this year (let's assume $15k with no dividends/gains, an itemized deduction of $15k, and our personal exemptions of $8k combined). I was figuring the estimated Federal Income Tax between my wife and I for the year to be around $12500 if both of us claim 0 allowances.

Given the $15k "base" estimate, this means that I'll still owe $2500 in taxes (for Federal) even if I claim 0 allowances? Does that sound about right? I understand the CA withholding is a bit different and can also be deducted from Federal, but I haven't even gone there yet...


Also, how do you guys deal with bonuses and supplemental wages? I was reviewing the section in the IRS publication but am thoroughly confused on the payout I received and what I calculated.
It could be right. I honestly have no idea, considering I don't know how much wage income you expect.
The bigger the capital gains and dividends relative to your wage income, the more withholding you will need on your W-2's.

I haven't read in detail how the tax withholding is actually calculated for bonuses and supplemental wages (by the way, what exactly are supplemental wages?) but if I had to guess it would be based on your W-4 information. What does the IRS publication tell you?

From what I'm reading in the publication, it says to add the bonus amount to the amount of the paycheck prior to it, factor in the allowances, and then proceed to using the tables as you normally would. Thing is, when I do this with 0 allowances, I get an estimated payout that's higher than what I'm currently getting back *with* allowances. So I'm pretty lost and confused. I'm sure I'm missing something (or several things)
Well it is within the realm of possibility that your employer is just not withholding the correct amount.

If that's the case, how would one go about correcting this?

MDM

  • Walrus Stache
  • *******
  • Posts: 7187
Re: Help with W-4 number of allowances (married dual income)
« Reply #24 on: February 09, 2015, 03:08:50 PM »
Also, how do you guys deal with bonuses and supplemental wages? I was reviewing the section in the IRS publication but am thoroughly confused on the payout I received and what I calculated.
I haven't read in detail how the tax withholding is actually calculated for bonuses and supplemental wages (by the way, what exactly are supplemental wages?) but if I had to guess it would be based on your W-4 information. What does the IRS publication tell you?
From what I'm reading in the publication, it says to add the bonus amount to the amount of the paycheck prior to it, factor in the allowances, and then proceed to using the tables as you normally would. Thing is, when I do this with 0 allowances, I get an estimated payout that's higher than what I'm currently getting back *with* allowances. So I'm pretty lost and confused. I'm sure I'm missing something (or several things)
For the IRS, companies will usually withhold 25% of any bonus or supplemental wage. Bonuses and supplemental wages are, more or less, any pay you get that isn't your normal paycheck.

Depending on how far down the rabbit hole you'd like to go, see the following for more details:
http://lorman.com/newsletter/article.php?article_id=1022&newsletter_id=222
http://irs.gov/pub/irs-wd/12-0063.pdf
http://law.cornell.edu/cfr/text/26/31.3402(g)-1
http://ecfr.gov/cgi-bin/text-idx?SID=8ea276d9e20f0225ca2a34e1b3d3eb4d&node=26:15.0.1.1.2.5.15.45&rgn=div8

I had to develop some expertise in this area. A pain for me, but if it can be of help to you I'm happy to answer....

MDM

  • Walrus Stache
  • *******
  • Posts: 7187
Re: Help with W-4 number of allowances (married dual income)
« Reply #25 on: February 09, 2015, 03:15:55 PM »
Also, how do you guys deal with bonuses and supplemental wages? I was reviewing the section in the IRS publication but am thoroughly confused on the payout I received and what I calculated.
To the larger question of "just how can one figure the correct allowances?" see /ask-a-mustachian/turbo-tax-vs-cpa/msg539186/#msg539186 and other posts in that thread for one example.
The spreadsheet there contains the supplemental wage calculations: correct for federal, but you'll have to roll your own for state. You can adjust the number of withholding allowances on the Salary tab and see the net tax result on the Tax tab. Certainly not the only way to do this.

jeromedawg

  • Handlebar Stache
  • *****
  • Posts: 2424
  • Location: Orange County, CA
Re: Help with W-4 number of allowances (married dual income)
« Reply #26 on: February 09, 2015, 03:25:12 PM »
Also, how do you guys deal with bonuses and supplemental wages? I was reviewing the section in the IRS publication but am thoroughly confused on the payout I received and what I calculated.
I haven't read in detail how the tax withholding is actually calculated for bonuses and supplemental wages (by the way, what exactly are supplemental wages?) but if I had to guess it would be based on your W-4 information. What does the IRS publication tell you?
From what I'm reading in the publication, it says to add the bonus amount to the amount of the paycheck prior to it, factor in the allowances, and then proceed to using the tables as you normally would. Thing is, when I do this with 0 allowances, I get an estimated payout that's higher than what I'm currently getting back *with* allowances. So I'm pretty lost and confused. I'm sure I'm missing something (or several things)
For the IRS, companies will usually withhold 25% of any bonus or supplemental wage. Bonuses and supplemental wages are, more or less, any pay you get that isn't your normal paycheck.

Depending on how far down the rabbit hole you'd like to go, see the following for more details:
http://lorman.com/newsletter/article.php?article_id=1022&newsletter_id=222
http://irs.gov/pub/irs-wd/12-0063.pdf
http://law.cornell.edu/cfr/text/26/31.3402(g)-1
http://ecfr.gov/cgi-bin/text-idx?SID=8ea276d9e20f0225ca2a34e1b3d3eb4d&node=26:15.0.1.1.2.5.15.45&rgn=div8

I had to develop some expertise in this area. A pain for me, but if it can be of help to you I'm happy to answer....

Ah I totally misread and overlooked the 25% as stated in the guide (and what Johnny pointed out already). The number I'm seeing now, after adding it all up is correct. It's lower than I expected because they're taking the 401k contribution, plus ESPP, aside from the rest of the taxes, etc. So *instead* of factoring in the withholding allowances, they're just taking the 25% flat fee, right?

jeromedawg

  • Handlebar Stache
  • *****
  • Posts: 2424
  • Location: Orange County, CA
Re: Help with W-4 number of allowances (married dual income)
« Reply #27 on: February 09, 2015, 03:30:50 PM »
Theoretically, if I didn't have a 401k any dividends/cap gains, and no FSA/Med/Den/Vis/etc (even though this will make you owe under Obama's plan now, right? But let's just say that it isn't like that, hypothetically), is my tax liability number supposed to end up being the *same* as the Federal Income Tax withheld from all my paychecks combined for that year? Or is the liability always expected to be more at base and then the goal is to try to get it as close to a difference of $0 as possible?

MDM

  • Walrus Stache
  • *******
  • Posts: 7187
Re: Help with W-4 number of allowances (married dual income)
« Reply #28 on: February 09, 2015, 03:47:08 PM »
Theoretically, if I didn't have a 401k any dividends/cap gains, and no FSA/Med/Den/Vis/etc (even though this will make you owe under Obama's plan now, right? But let's just say that it isn't like that, hypothetically), is my tax liability number supposed to end up being the *same* as the Federal Income Tax withheld from all my paychecks combined for that year? Or is the liability always expected to be more at base and then the goal is to try to get it as close to a difference of $0 as possible?
Not quite sure how to read "supposed to" (according to whom?) and "at base" (what base?).

The IRS would be quite happy to withhold all your paycheck, then send you a large refund when you file in April. It is up to you, via use of your W-4, to have withheld an amount close to your total tax liability for the year if you don't want to
- give the IRS that huge interest-free loan when withholding is too high, or
- be subject to a penalty if you owe "too much" in April because withholding is too low.

See /ask-a-mustachian/exemption-from-federal-withholding-on-w4/ for more on the general topic, and specifics on the penalty and how to avoid it.

jeromedawg

  • Handlebar Stache
  • *****
  • Posts: 2424
  • Location: Orange County, CA
Re: Help with W-4 number of allowances (married dual income)
« Reply #29 on: February 09, 2015, 04:01:45 PM »
Theoretically, if I didn't have a 401k any dividends/cap gains, and no FSA/Med/Den/Vis/etc (even though this will make you owe under Obama's plan now, right? But let's just say that it isn't like that, hypothetically), is my tax liability number supposed to end up being the *same* as the Federal Income Tax withheld from all my paychecks combined for that year? Or is the liability always expected to be more at base and then the goal is to try to get it as close to a difference of $0 as possible?
Not quite sure how to read "supposed to" (according to whom?) and "at base" (what base?).

The IRS would be quite happy to withhold all your paycheck, then send you a large refund when you file in April. It is up to you, via use of your W-4, to have withheld an amount close to your total tax liability for the year if you don't want to
- give the IRS that huge interest-free loan when withholding is too high, or
- be subject to a penalty if you owe "too much" in April because withholding is too low.

See /ask-a-mustachian/exemption-from-federal-withholding-on-w4/ for more on the general topic, and specifics on the penalty and how to avoid it.

Sorry, that was confusing... let's say I calculated my liability to be $14k-15k and the amount withheld from each paycheck (without allowances) is around $12,500, this means I still owe at least $1500-2500 right? So is it best then just to "withhold additional" ($1500/26 or whatever) so as to avoid the penalty (from the thread you reference it looks like if you owe over $1000 you'll be penalized). I keep hearing about how it's not a good idea to give an "interest free loan" to the govt but wouldn't that only make sense in the context of when you expect an refund? If you're not expecting a refund and expect to owe, I'm assuming the main goal would be to avoid the penalty by estimating the additional amount to withhold from each paycheck to get you from anywhere between $0-$1000 owed by the end of the year.
« Last Edit: February 09, 2015, 04:04:23 PM by jplee3 »

MDM

  • Walrus Stache
  • *******
  • Posts: 7187
Re: Help with W-4 number of allowances (married dual income)
« Reply #30 on: February 09, 2015, 04:25:39 PM »
... let's say I calculated my liability to be $14k-15k and the amount withheld from each paycheck (without allowances) is around $12,500, this means I still owe at least $1500-2500 right? So is it best then just to "withhold additional" ($1500/26 or whatever) so as to avoid the penalty (from the thread you reference it looks like if you owe over $1000 you'll be penalized). I keep hearing about how it's not a good idea to give an "interest free loan" to the govt but wouldn't that only make sense in the context of when you expect an refund? If you're not expecting a refund and expect to owe, I'm assuming the main goal would be to avoid the penalty by estimating the additional amount to withhold from each paycheck to get you from anywhere between $0-$1000 owed by the end of the year.

Yes, exactly!