How do I avoid another 25k dollar tax bill?

[Bott1637]

I'm a hospital based surgical specialist paid on a W2.  My W4 was set at two exemptions as I was single (got married this fall).  I'm now married with one dependent.  Last year I had a refund of a couple thousand dollars so I felt I was spot on withholding wise.  This year I've had a 20% increase in income pushing me into the highest tax bracket and early calculations on turbo tax have me owing around 25k!  My payment model changed in that I am now completely on production which is a base salary plus a quarterly settlement distribution, i.e. my production salaray minus my base is paid out four times a year.  Is it that payment model which led to this?  Just earning the extra money and jumping tax brackets shouldn't have done this right?  Did I reach some income level where I should have been doing something different tax-wise?

More importantly, what's done is done, how do I avoid this going forward?  I found an IRS calculator that has you input your withholding YTD and your last paycheck and it tells you what to put on your W4. That calculator assumes you're paying the same in tax on each check, but my checks are all different.  I get paid twice per month.  Call pay is only the second check of the month.  Then every third 'end of month check' has the production settlement.  I just changed my W4 to zero exemptions to get the most tax withheld but owing that much I'm not sure that will even do.  Can I ****************************** out our payroll people for screwing me somehow (yes this is what I REALLY want to do)?  Do I need an accountant?  Do I need to wait until Jim finally finishes his tax book?  Just take the tax I owed this year and divide it by how many paychecks I get and just have them withhold a static amount?

[jfoxcpacfp]

Check your spouse's W2. I don't know what you guys are making, but what has most likely affected you the most is:

• New spouse was withholding a minimal amount all year, normally got a refund. Your tax bracket bumped her (I'm assuming your a man from the way this is worded, no offense) wages up another couple of tax brackets.


• If there is much differential in the differential in your base and the quarterly settlement, one or the other is being under-withheld. Might want to check with payroll to see how they are calculating withholding on the quarterly settlement - as a true quarterly or perhaps as an annual, which would mean they are under-withholding.


• AMT?

Probably nobody's fault. I think it would be in poor taste to "****************************** out your payroll people" but I suppose if you want to indulge your fantasies...

Be sure that your spouse withholds extra on her paychecks this year. It will help for you to withhold more if your payroll department is already withholding correctly.

I don't know that having a CPA prepare your return will help that much if this is really a 2 - W2 return. I guess you itemize? Rental property? Doubt there's much else going on.

[Bott1637]

I knew I was going to get hit with my tax bracket bumping her so I ran things on turbo tax pretending I was still single and still would owe more than 20k which is what made me question the withholdings.  She'll be leaving the work force in the next couple months so there isn't a lot I can do there.  I agree a CPA is not likely to do anything different on this return as it is simple W2 as only income source.  I wasn't sure if they would be able to help figure out what to do with my withholdings this calendar year however.

I'll check with payroll on how they withhold the settlements.  Just got one today for last quarter's settlement.  I compared my first check of the month and the second from today which has the settlement and they both come out to 22% of my gross going to federal so it appears they aren't treating them any differently.

[DMFA]

We're not even close to the top bracket (in 33%) and we have to withhold as single, zero exemptions, and have extra few hundred dollars withheld each paycheck to get to our effective tax rate of about 19%.  If you average it out as though all paychecks were equal, it should still work.

[The White Coat Investor]

Welcome to the world of self-employed physicians everywhere. The usual solution those of us who are wise go for is paying enough to make sure we're in the safe harbor, but withholding (in our savings account) even more than we owe. It's just like a tax refund when you find out you overwithheld, except you didn't provide a free loan to Uncle Sam.

I might be writing a six figure check to the IRS in April despite sending them quarterly estimateds that were 10% higher than what I owed last year. What a great problem to have!

It's really only an issue if you spent the money. So, the bottom line is save more and make sure you're in the safe harbor rather than worrying about whether you get your W-4 exactly right or not. It's an impossible task at physician level incomes, especially if there is much variation.

[The White Coat Investor]

Well, I ran my estimates for my 2016 tax bill. I'm going to owe another $109K in Federal tax, my estimated tax for 1st quarter will be $81K, and I'll owe the state $41K. That's $230K in tax bills going out in April alone. Almost my entire physician income for 2016 will go to income and payroll taxes.

The only lame part is I've only been saving 27% of my income for taxes (I paid 25% last year) and it will be over 31% this year as an effective tax rate.

First world problems.

[PhysicianOnFIRE]

Donate $45,000.

[Craigy]

You should update your W4 to 0 and have an additional amount deducted from each paycheck.  Neither my wife or I are an attending physician and on her W4 she claims 0 and on mine I claim 0 with a couple hundred additional deducted from each check just to ensure I don't have a balance due at the end of the year.

[Craigy]

The White Coat Investor wrote:

Well, I ran my estimates for my 2016 tax bill. I’m going to owe another $109K in Federal tax, my estimated tax for 1st quarter will be $81K, and I’ll owe the state $41K. That’s $230K in tax bills going out in April alone. Almost my entire physician income for 2016 will go to income and payroll taxes.

The only lame part is I’ve only been saving 27% of my income for taxes (I paid 25% last year) and it will be over 31% this year as an effective tax rate.

First world problems.

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Taxes on the wealthy are 2nd and 3rd world problems too.  In theory the 1st world should be paying at a much lower rate, particularly in the USA, with capitalism and all that.

[Bott1637]

Just so I'm understanding the proper approach here...

I know my effective tax rate after doing my taxes each year.  So one should aim to set their W4 and any extra withheld so that their federal withholding matches this effective tax rate.  And this percent is simply YTD federal/YTD gross on a paystub? Plus whatever fudge factor one is comfortable with, say one or two percent as WCI mentioned above, saved elsewhere?

[The White Coat Investor]

You're talking about an employee situation and I'm talking about a self-employed situation. Significant differences.

As an employee, the government assumes you're stupid and undisciplined. So it doesn't ask you "how much do you want withheld from each paycheck." It has you fill out a W-4 and then uses that to guess how much you want withheld from each paycheck. So now you have to play a little game with the personal allowances. And the rules about how many you are allowed to claim is fuzzy, so your ability to manipulate the form is limited. However, you do have the ability to have additional money withheld using line 6 on the W-4. But it's hard to use that in combination with the personal allowance guessing game.

[MaxPower]

I've found the IRS website completely unhelpful (including the W4/withholding calculator) for situations like this. That is great for people that get paid the exact same amount for every paycheck, but not for people who occasionally have 50-100% (or more) variation between paychecks.

If it were me, I would go down to 0 exemptions on my W4 (like you did) and then have $500-750 extra deducted from each paycheck. Then after receiving the 2nd every 3 months check (2nd quarter production payment), calculate your estimated federal income tax liability (guessing that you'll have 2x more salary for the entire year) and make sure you're close with what you've had already withheld. Then you can always adjust up or down on your W4 midway through the year so you're not way off. Then next year figure out what the withholding number needs to be per check.

[childay]

Myself, I withold extra each month with zero exemptions as mentioned above. I don't believe the IRS penalizes you for the first year of underwitholding.  If you don't increase your W4 form you could also make quarterly estimated payments, depending on your income through the year.. I'm not sure if your spouse is working as well?  That makes it a bit more complicated.

[PNWskindoc]

So I'm taking 4 allowances for myself, SAHM, and daughter. We just have one income / employer. Should I be adjusting my allowances too?

[DMFA]

PNWskindoc wrote:

So I’m taking 4 allowances for myself, SAHM, and daughter. We just have one income / employer. Should I be adjusting my allowances too?

Click to expand...

Depends on how much you make and how much ends up being withheld.  If you can estimate your deductions for the year, it should be very easy to figure your taxable income and, therefore, your total tax due and the effective percent.  Then you figure out how to get that percentage based on filing status, exemptions, or add'l amount withheld.  The IRS calculator really does work if you know those things, especially if you have only one income.