Preparing taxes via TT, owing 30K so far...

[bluelake]

Hi, I'm pretty green compared to most of you posting here, but I'm hoping to get some help/guidance:

2016 was my first full year of relatively high earnings (430K as reported in box 1 of W2) as an attending physician employed by a hospital. My spouse makes about 80K (box 1 W2). I am doing my taxes via TurboTax as I have done for years. I have input mortgage interest, student loan interest, etc.

We still owe about 30K so far.. From what I am coming to understand, the witholding tables do not take enough out of my income even though we have 2 children and only marked '1' for dependents, spouse marked 0 on their W2. Was I supposed to have made estimated payments throughout last year? I figured that the W4 witholding I selected would be adequate.

Is it normal for physicians in that salary range to end up owing that much each year? Is it pretty much the norm that all physicians in that income range must be making estimated payments (or having additional money taken out on W4)? We have the money to pay what we owe, but I was surprised by the number. How else could I have/or can I shelter earnings...?

Some of what I'm saying may appear to be naive. I'm still learning, so I thought I would post here.  If I've left any relevant info out, let me know. I'm also going to look into filing separately so we don't hit AMT..?

We maxed out 401Ks and have not yet put anything into Roth IRA (although I think I will not be able to based on our income). How else can I reduce this tax bill. I may have some hard lessons learned here, but I'd rather put it all out there - so that I can learn from any mistakes we've made.

 

[Live Free MD]

I had the same experience my first year making decent income as a W2 Employee.

I had "0" exemptions on my W4, no kids, and no mortgage interest deduction.  I still owed 20K at the end of the year.

Thankfully, I did not owe any penalties because I paid over 110% of my total tax owed the prior year.  For more details on avoiding the underpayment penalty see: https://www.irs.gov/publications/p505/ch04.html

In an attempt to avoid this issue in the future, I calculated my effective federal income tax rate that year, and then told my employer to take that exact percentage out of every paycheck.  If your income continues to increase, just make sure you pay at least 110% of your tax from the prior year, and you will not owe any penalties.  It might be worth a quick check at the end of the year to make sure you are on track to meet this requirement.  If not, you could send in an additional tax payment to avoid the penalty.

[jfoxcpacfp]

bluelake wrote:

Is it normal for physicians in that salary range to end up owing that much each year? Is it pretty much the norm that all physicians in that income range must be making estimated payments (or having additional money taken out on W4)?

Click to expand...

Your main problem is that withholding on your wife's salary is being calculated at a much lower marginal tax rate, as if your family's taxable income for the year was going to be around the 15% tax bracket rather than your joint  marginal tax bracket at 35%. This happens often when there is a large disparity between wages of the 2 spouses. It's not anybody's fault, just the way tax tables work.  Live Free MD explained what you need to do to avoid this in the future.

[StarTrekDoc]

Exactly; it's the lower W2 withholding that's causing the issue because the household rate is much higher.  We ran into this with wife's W2 too.

Fortunately, our withholding increased every year so avoiding the underpayment penalty.

If you're not ramping up; ask HR to increase the withholding on either one of you a little to get there.

 

[Dreamgiver]

Had this exact problem. Our solution was to max out my wife's retirement contributions so now more than half her salary is tax deferred.

[adventure]

One of our paychecks has a fat extra bunch sent to uncle same. W-4, Line 6. The two earners worksheet on page 2 of the W-4 seems to be close enough for us.

I do typically enter everything in TT a year ahead (estimates) to determine if any changes will impact our situation sufficiently to change the extra withholding. (e.g. mortgage interest deduction, when going from renting -> owning, charity, roth conversions, etc).

The 110% is key though, pay attention to that.

[Craigy]

Yeah just claiming 0 on the W4s doesn't help you.  Just putting a number in that box is for the plebeians.  We don't even have an attending income and I have to withhold extra on my W4.

Your spouse needs to start sending the max toward 401k, and you both should be withholding extra.

[AZdoc68]

Dreamgiver wrote:

Had this exact problem. Our solution was to max out my wife’s retirement contributions so now more than half her salary is tax deferred.

Click to expand...

I do the same thing.  My wife earns about $50k total gross thru 2 different colleges so we direct most of her income into a 401k and a 457.  Otherwise her income would be taxed at at least the 33% federal bracket, probably higher.