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W-4/withholding questions

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  • W-4/withholding questions

    Having recently started our first jobs post residency, my wife and I are filling out our W-4s and had a few questions. FYI: We are filing MFS for loan payment minimization reasons.

    1) Just to clarify, we each obviously fill out a W-4, but does each of us compute/determine the two-earner additional tax to be withheld? Or just one of us? Is this affected by selecting the "Married, but withhold at higher Single rate" option? The additional amount I'm calculating to be withheld seems high and unusual--I don't want to underpay, but I also don't want to overpay by a large amount.

    2) We also recently had a capital gain for this quarter. I was reading on Bogleheads that making a one time estimated tax payment can mean additional paperwork (Form 2210) to prove that you were not underpaying all year long and instead had fluctuating income (eg, due to the one time capital gain). For those that deal with intermittent/infrequent capital gains such as this do you send in periodic estimated tax payments and fill our Form 2210 or do you update your W-4 to withhold an additional amount to reflect the additional tax you owe? Or should Form 2210 be filled out regardless? Thoughts/suggestions?

    I'm very glad I looked at the actual IRS W-4 form which had the extra page with calculating some other scenarios (eg, two earners) because the forms to fill out on both of our companies' sites lack all that nuance.

  • #2
    Choose the married but w/h at higher single rate. The requirement to avoid a penalty is that you, in general, pay in at least your prior year's total tax due (not tax due after withholdings) for the next year. You may have a balance due at 4/15, but no penalty.

    The capital gain will fall under this rule. There should be no requirement for the 2210 since, this being your first year post-training, you have to meet a lower threshold of taxes due for 2015 when you were earning residents' pay for a full year. The married/choose single will pick up at least part of the taxes due on the CG. Of course, I'm guessing b/c you didn't provide the amount of the gain or whether it was LT or ST.

    If, for some unexpected reason, you did need to fill in a 2210, your tax software will easily handle it. You're not doing your taxes by hand, are you?
    My passion is protecting clients and others from predatory and ignorant advisors 270-247-6087 for CPA clients (we are Flat Fee for both CPA & Fee-Only Financial Planning)
    Johanna Fox, CPA, CFP is affiliated with Wrenne Financial for financial planning clients


    • #3
      For your question #1, the W4 worksheet is for either one person with two jobs or for two income-earning spouses. So the total extra tax to be withheld can be done by one person or divided proportionally or equally among both spouses etc. There is an online tax calculator via the IRS that you can use but I personally prefer the W4 PDF when working out the calculations. As Johanna said, this tax year you won't have to worry about penalties as your total taxes withheld no matter what you do will be >90% of the value from last year, but I would try to get this at least close to right to not have any unpleasant surprises come April, 2017.

      You already know that your tax burden will be higher when filing MFS. Make sure to run the numbers both ways in your tax software. If you are both physicians you may find that your loan payment per month does not change significantly by including your spouse's income if you are already "maxed out" to a 10 year repayment schedule based on your income alone (for IBR for example). You may be able to use the online calculator depending on your lender or talk to someone on the phone for this without being on the hook for making any actual changes. There are also other downsides to filing separately that you can investigate if interested.


      • #4

        1) I thought maybe I was covered if I paid that 90% of last year's tax but since my income this year is twice that of last year, I wasn't fully sure.

        2) Capital gain is long-term.

        3) Not doing taxes by hand, but I try to look at the IRS forms that I think will be part of my return. Tax software doesn't fully explain things AND I feel that sometimes it misses things (for instance, TaxAct never generates a depreciation schedule for rental property, which CPAs have told me should be included in the return--not sure if it's true or not)



        Thanks for the clarifications. The online IRS withholding calculator told me I should take 22 exemptions and pay less--the opposite of what the actual W4 was suggesting. Like you say, I think for two earning spouses the form presumes MFJ and that's why the numbers are high?


        • #5

          1. The 90% of tax exception is for taxes owed in the current year, not the previous year. Either 100% of previous year or 90% of the current year.

          2. This is good because your LTCG w/n/b taxed at your highest marginal tax rate.

          3. No, you are not required to include a depreciation schedule with your return, but you are required to file Form 4562 to report depreciation and amortization.

          Fact: another benefit of filing as MFS is that you are not on the hook for a spouse's unpaid tax liability or fraud if you have not signed their return. That is why the IRS allows people to amend MFS to MFJ, but will not allow a MFJ to amend to MFS, even though they probably will net more in taxes.
          My passion is protecting clients and others from predatory and ignorant advisors 270-247-6087 for CPA clients (we are Flat Fee for both CPA & Fee-Only Financial Planning)
          Johanna Fox, CPA, CFP is affiliated with Wrenne Financial for financial planning clients


          • #6
            1) Duh, I got that backwards

            2) I agree!

            3) Sorry, that's what I meant. TaxAct never generated that for me and I'm not sure how to "force" it to do so.