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Recalculating Withholdings Question

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  • Avatar huskie92 
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    Status: Spouse
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    Joined: 01/23/2018

    Hello all. I am currently reassessing our withholdings again as last year we had a very large return that I would like to make better use of. I don’t mind getting a little refund but we certainly have been overwithholding. We are both W2 employees in case that matters in this scenario. Anyways, I am using the IRS withholding calculator and am at a pause on the “Bonus income” line. My wife certainly gets quarterly bonuses every year but they are taxed like they are regular income. Fed/State/FICA/etc are taken out like normal. Should I input this as bonus income or is that line reserved for a different type of bonus (if there is such a thing?). Thanks so much for any advice.

    #214687 Reply
    Avatar JBME 
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    Status: Spouse
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    Joined: 03/26/2018

    others should chime in, but my experience (and those of friends who get bonuses) is that the tax withholding on bonuses is actually higher than whatever your W4 states. Whereas I usually have 20% or so withheld from my regular paycheck for federal taxes, when I get my bonus paid, I lose about 35% to federal taxes. it just happens too…nothing I can do about it. the company I believe by law has to do that

    #214691 Reply
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    CordMcNally CordMcNally 
    Participant
    Status: Physician
    Posts: 2132
    Joined: 01/03/2017

    Is your income this year going to be similar to your income last year?

    “But investing isn’t about beating others at their game. It’s about controlling yourself at your own game.”
    ― Benjamin Graham, The Intelligent Investor

    #214692 Reply
    Avatar huskie92 
    Participant
    Status: Spouse
    Posts: 104
    Joined: 01/23/2018

    I would say yes it should be fairly close. Bonuses are roughly the same each quarter from year to year give or take a few thousand. Monthly pay is constant as well.

    #214695 Reply
    Avatar huskie92 
    Participant
    Status: Spouse
    Posts: 104
    Joined: 01/23/2018

    others should chime in, but my experience (and those of friends who get bonuses) is that the tax withholding on bonuses is actually higher than whatever your W4 states. Whereas I usually have 20% or so withheld from my regular paycheck for federal taxes, when I get my bonus paid, I lose about 35% to federal taxes. it just happens too…nothing I can do about it. the company I believe by law has to do that

    Click to expand…

    I notice this as well. Bonuses are taxed at near the highest marginal tax rate but her regular checks are much lower.

    #214696 Reply
    Avatar huskie92 
    Participant
    Status: Spouse
    Posts: 104
    Joined: 01/23/2018

    I found this article about how bonuses are treated by the IRS. It seems that my wife’s practice goes by the percentage method but as I look back it is certainly not a fixed percentage. It starts at 30% and rises to 35% as the bonuses get larger throughout the year. This calculator certainly doesn’t make this process easy. And I hear it will only get worse with the coming revamp of withholdings. I guess my best shot at any sort of accuracy might be to just to do the whole thing twice…once using the bonus box and once without.

    #214708 Reply
    CordMcNally CordMcNally 
    Participant
    Status: Physician
    Posts: 2132
    Joined: 01/03/2017

    Since your income is going to be similar, just look at how much is being taken out of your checks and adjust your withholding to get your amounts to add up to your approximate tax liability you had last year.

    “But investing isn’t about beating others at their game. It’s about controlling yourself at your own game.”
    ― Benjamin Graham, The Intelligent Investor

    #214710 Reply
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    Avatar huskie92 
    Participant
    Status: Spouse
    Posts: 104
    Joined: 01/23/2018

    Since your income is going to be similar, just look at how much is being taken out of your checks and adjust your withholding to get your amounts to add up to your approximate tax liability you had last year.

    Click to expand…

    Well there you have it…That makes a bit of sense lol. Here I am trying to overcomplicate my life. Thanks.

    #214712 Reply
    Avatar jacoavlu 
    Moderator
    Status: Physician, Small Business Owner
    Posts: 1848
    Joined: 03/01/2018

    Another option. Figure out your safe harbor minimum. This is likely to be 90% of your current year tax liability – meaning you have to try to come up with an accurate tax estimate. Or, I’m assuming you’re a high earner, you can pay (withhold) 110% of last years tax liability.

    If overall income is similar to last year then the 90% is your true safe harbor.

    If income were going up then the 110% number may be a true safe harbor in that this amount would be less than 90% of current year tax due.

    Make sense?

    My goal is to withhold the minimum amount necessary to avoid penalty. Then pay the balance due with tax filing.

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #214818 Reply
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