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How to calculate tax withholding?

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  • How to calculate tax withholding?

    Is it possible to calculate a somewhat accurate way to withhold taxes throughout the year?

    For our 2016 taxes we owed $8k, which was all marriage tax penalty. Our withholdings were based off the default inputs into each of our W4's, we owed more because neither employer accounted for the other's income.

    For 2017 I increased my withholdings to what I thought would cover the balance. We also bought a new house (and therefore had more mortgage interest) and paid for daycare the entire year instead of only a few months (our son started daycare late 2016). We also had more income. I've entered everything I have so far into turbotax and it looks like we will get a refund of about $6k. Don't get me wrong it's better than owing $8k but we did just give the government an interest-free loan.

    I would like to get the withholdings somewhat close- within $1000 either way would be good. For this year, obviously there are big changes with the new tax law, we will have even more mortgage interest (because we moved midway through 2017), and income may be different because I am paid on productivity. We are both W2 employees. Got hit by AMT each of the past 2 years, no idea whether we will pay it in 2018. Any tips on how to calculate withholding so we're somewhere in the ballpark of what we owe?

  • #2
    Good luck with that in 2018 - w/b easier once this new tax law is all ironed out and we have up-to-date planning software. I would overlook the interest-free loan of $6k - it's peanuts in the big scheme of things and, like you said, better than having to cough up $8k in April.

    We work with clients year-round to prepare tax projections so there won't be any April surprises, and I still wouldn't expect to be as close as $1k. Doctors' earnings typically vary from month to month and we're kind of chasing a moving target. While we do expect to have a pretty close estimate if we can get a final projection in December, that doesn't mean the client will literally owe or receive $1,000, just that they'll know what to expect. Managing expectations is the key, at least here. For an employee, for example, you may not have the time to adjust your payroll if you find out in December that you're going to owe a few thousand more than we had projected in July or August.

    otoh, if all you have are 2-W2s with stable salaries, it should be fairly easy to estimate where you'll fall and adjust accordingly. You just have to stay on top of it all.
    Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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    • #3
      We use a mix of TurboTax, and the W4 two-earner spreadsheet, and excel (especially for 2018 - getting closeish is our goal). I can estimate our salaries * tax bracket (federal and state), and then substract/add deductions and AMT. Getting within a few thousand is close enough for me at this point - it gets me to a close enough withholding (allowances and $200 or $500 extra (or whatever) taken out each month).

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      • #4
        It's a real crapshoot.  IMO a $6k refund for income at your level is pretty good "close enuff."  Depends on your tolerance for having a balance due.

        I want to say someone on here (WCI, Zaphod maybe??) talked about basically using turbotax to back into what your withholdings should be. There are also various withholding calculators available online of varying usefulness.  Obviously you can just take your taxes and divide them by your paychecks and voila.

        But the way the W4 works doesn't really let you input a specific amount or percentage.  Plus there's about a million other variables of things that come out of your check at the same time (fed tax, state tax, fica tax, medicare tax, 403b/401k, life, disability, health, dental, unemployment). And then the way W4s work in 2018 is going to change from how they worked in 2017.  Just checked IRS website and the 18 W4s are not out yet.  Plus there is a worksheet on the back of the W4 which I recall being pretty useless.  Basically the tax code (and the W4) is sexist and assumes only one spouse (i.e., the man) has any job of any significance.    The W4 also further assumes you're either 1) a complete buffoon incapable of maths or 2) a mind-reading actuary or IRS tax form writer.

        My wife and I both file zero allowances, married-but-withhold-at-single-rate, and I think I take a couple hundred extra out on top of that from each of my paychecks, because marriage penalty.  I'll see how it turns out I guess.

        You could try giving one or the other an extra allowance.   Again I wouldn't adjust too much since you're pretty close as-is.

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        • #5
          yes there are great calculators (that will be updated with the new stuff soon).

          so i would also say, tax withholding is fluid. things change. re-visit your w4 2-3x/year and adjust as necessary.

          no one said you just set it and forget it...

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