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Discrepancy Between Federal and State Taxes

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  • Discrepancy Between Federal and State Taxes

    I'm a fellow and have a dual-income, no child household. University-based position, married filing jointly. We didn't have any deductions or additional money withheld for taxes in our W4. Only other income is a few thousand for an honorarium and also a few thousand in the form of educational payments paid by my employer. Somehow in the 2020 taxes I am getting a small refund from state taxes, but owe several thousand in federal taxes (enough to have to pay a penalty even). Any thoughts to where something might have gone wrong to allow this to happen? For now I've dramatically increased the W4 so that the same thing doesn't happen in the 2021 taxes.

  • #2
    Withholding is always an estimate and will typically be off a bit. The fact that you are overwithheld for state and underwithheld for federal is not that unusual. As your tax situation becomes more complex, the withholding being a bit off will become more and more likely. Also, states and federal tax laws are different and some types of income will be taxed differently by the state in comparison with the IRS. If you are pretty close, that should be good enough. If you want a refund every year, increase your withholding.


    • #3
      Typically the difference is in one of two things. Taxable income is computed differently OR the withholding tax for special payments. This typically occurs on a special payroll run to avoid taxing as if that payment was recurring.

      “Only other income is a few thousand for an honorarium and also a few thousand in the form of educational payments paid by my employer”
      Speculation is FIT was withheld at 20%.on these items.

      With dual income, each person’s FIT separately will be lower than the combined marginal tax rate.

      it can only be on the taxable amount or withholding rates. Fellowship is a good time to learn withholding and safe harbor.
      The good news, the penalties this year are cheap tuition to motivate you to dig into it.


      • #4
        Probably doesn’t help to know this, but having this situation is rather unusual for a fellow, especially if you’ve not had it during residency and did not make a change in withholdings. If that is the case, then I have to wonder if there is an error somewhere in your input. Otherswise, certainly concur withWhite.Beard.Doc andTim.
        Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087