$15K Tax Bill in Final Year of Residency

[Jarpee]

Hey all, longtime blog reader but first time forum poster. So I am in my final year of residency and signed on as a hospitalist last year. I have received a sign on bonus and stipend in 2016 of ~$35k. I anticipated our tax bill to be higher than last year (2015) so my wife and I each claimed only 1 exemption on W4 after I signed. I was very surprised to see a tax bill of $15K on taxact when I did a preliminary run through our taxes last night. We live in KY this year so state income taxes are in play (part of the 15k). The $35k was reported on 1099-Misc as non-employment income. Our total household income other than the 1099-misc was ~110K on our W2s. I just wanted to make sure I wasn't missing something in regards to the 1099-Misc or any deductions/credits I may be eligible for. A $15K tax bill seems crazy high to me (I understand I owe SS and Medicare on the 35K but jeez). I have paid for boards and travel going back and forth between my current home and my future job so I will deduct those from my "self employed" income (1099-misc), but I just wanted to make sure I wasn't missing anything else. Appreciate any help and comments.

Thanks

[jfoxcpacfp]

Yikes! Sounds a bit high to me, too. Are you and your wife filing "Married filing separately on a combined return"? It's an oddity of filing in KY. I would guess around $10k, without getting into the weeds. Too much I don't know.

[Zaphod]

It gets worse...

Does sound odd, can/have you maxed out 401/403, etc...?

[Jarpee]

We are filing married and joint return. We have been contributing to my wife's 401k but did not max it out as I have been heavily paying down my student loans instead while maxing Roth IRAs of course. I may run the numbers as married filing separately to see if there is a difference, but by just looking at the brackets it doesn't look like it.

[Jarpee]

Married filing separately has a bill of ~19K per TaxAct, so no dice on changing filing status.

[Jarpee]

I did notice on tax act "taxes" section that with the 35K reported I have a income tax of ~$18K and a separate self employment tax of ~$4.5K. When I take the 35K out of my return I only have an income tax of ~$11K with a tax bill of ~$1.5K due (lower than last year).

[jfoxcpacfp]

Jarpee wrote:

Married filing separately has a bill of ~19K per TaxAct, so no dice on changing filing status.

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What I mean is "Married Filing Separately on a Combined Return". If you and your spouse both have income, you will almost certainly save money going with this but most people who DIY don't realize it. They think this is the same as "Married Filing Separately", also available in Kentucky, but it is not.

The only exception is if your spouse didn't earn much (such as, under $2K, but I'm estimating).

[Jarpee]

Excuse my ignorance, I don't see a separate with combined return as an option. It is only for the state return?

 

Edit: I have found this option on the state return, good call, it saves us about 3K. Bill now is down to 12.4K. I just looked at Taxact's National Averages Comparison for our AGI, and it says the national average of "taxable income" is about 12K in our bracket. Ours is 108K! The national average return also has 10K more income than us. I must really be missing something here.

[MaxPower]

I doubt you're missing much. You're just experiencing the joy of being "self employed." I experienced the same joy when I signed my contract and got a $35k signing bonus and $70k loan repayment sent to me as a $105,000 check (better believe I took a picture holding that thing--was half expecting it to come on one of those giant checks you see at golf tournaments and Reader's Digest sweepstakes). Was roses until my tax bill came that next April...

[Jarpee]

Sorry to keep spamming the thread but I think I have found a potential issue. So the nonemployee MISC-1099 income is counted toward my AGI and my income taxes due are higher than last year 11.3k vs 18.7k, I get this it makes sense. However further down the page there is also a "self employment tax" that is 4.4k. It appears as if I am paying taxes twice on that 1099 income...? Is this how it is supposed to work? I really do hate taxes.

[MaxPower]

You're just now paying both the employer and employee side of the taxes. That's what happens in self employment. Fun times, huh?

[abds]

Jarpee wrote:

Sorry to keep spamming the thread but I think I have found a potential issue. So the nonemployee MISC-1099 income is counted toward my AGI and my income taxes due are higher than last year 11.3k vs 18.7k, I get this it makes sense. However further down the page there is also a “self employment tax” that is 4.4k. It appears as if I am paying taxes twice on that 1099 income…? Is this how it is supposed to work? I really do hate taxes.

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Self employment tax is the social security and medicare tax that you have to pay, in addition to the standard income tax everyone things of. For self employment, you have to pay your share as well as the employer's. You stop paying the social security part somewhere around 118K AGI. I'm guessing they split it out like that for you because that is the amount that is deductible on your state taxes. I've been doing the 1099-misc crap for several years, but I'm not an accountant so anyone who knows more about this please feel free to correct me.

[jfoxcpacfp]

Jarpee wrote:

Excuse my ignorance, I don’t see a separate with combined return as an option. It is only for the state return?

 

Edit: I have found this option on the state return, good call, it saves us about 3K. Bill now is down to 12.4K. I just looked at Taxact’s National Averages Comparison for our AGI, and it says the national average of “taxable income” is about 12K in our bracket. Ours is 108K! The national average return also has 10K more income than us. I must really be missing something here.

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See "Filing Status" on the attached page 1 of Form 740. You would choose #2 instead of #3 or #4. Make sense?

[DMFA]

Nothing gets withheld up front on 1099 income. On W-2 employed income, you see everything that comes out on the paycheck: your withholding (based on the exemptions you claimed on W-4), 6.2% for social security, and 1.45% for Medicare. You still owe all that on 1099s, plus the employer's share of FICA (SS/MCR) for another 7.65% (hence self-employment tax is 15.3%).

So, on that $35,000, you're out $5,355 for self-employment tax, plus whatever your federal uncle tax rate is, I'll assume 25%, so $8,750 = $14,105 in unpaid tax from that 1099 pay.

Check my work, obv...

[The White Coat Investor]

Jarpee wrote:

Sorry to keep spamming the thread but I think I have found a potential issue. So the nonemployee MISC-1099 income is counted toward my AGI and my income taxes due are higher than last year 11.3k vs 18.7k, I get this it makes sense. However further down the page there is also a “self employment tax” that is 4.4k. It appears as if I am paying taxes twice on that 1099 income…? Is this how it is supposed to work? I really do hate taxes.

Click to expand...

This is really fun to watch someone learn about our progressive tax system. While it FEELS like you're paying taxes twice, that's just because you basically haven't been paying taxes up until now in your life due to the progressiveness of the system and because your employer has been covering a significant chunk of those taxes for you.