I don't mind paying taxes, I just want them to be predictable.
January 28, 2014 12:12 PM   Subscribe

This question is about taxes, withholding, and multiple W2s. Can you help?

Every year, the situation is always the same. We get a moderate refund on our Federal taxes, but we end up owing the state quite a bit. Every year or two I readjust our withholding (in sometimes what seem to be very strange ways) and think I've fixed it, but then the problem rears its head again.

For 2013, the situation is as follows: I changed jobs in February 2013. Using Turbo Tax, when I put in my husband's (very stable) salary and the W2 for my current job, we had a Federal refund of about $1400 and owed the State a manageable $87 (most of which was the 'use tax' which isn't part of withholding). These numbers were in-line with what I expected, and with our tax bills/refunds in 2012. Other than getting my W2 from the job I left in February 2013, our taxes were complete.

Last night I added the last W2, which was about $6500 worth of income. Our federal refund dropped a couple of hundred dollars. Our state tax bill increased from $87 to $452.

I understand that the core problem is "not enough withholding". What I'm working through (and frustrated with) is this: If my state withholding was exactly the same for job A and job B, and the withholding at Job B was enough to (pretty much) cover the full taxes on Job B, and last year the withholding at Job A was enough to (pretty much) cover the full taxes on Job A, why did adding in the 2013 income and withholding from Job A increase our tax bill so much?

Is this somehow related to it being on two W2s? Is it related to my moving into a new tax rate bracket for Job B? Do I need to radically adjust my withholding for my state taxes (yet again), or will this resolve itself next year when I once again only have a single W2? Or, because the tax laws change every year, am I just chasing my tail and should resign myself to my withholding for the state always being either radically over or radically under, never hitting "just right"?

The state is Maine. I understand that a local tax accountant could answer these questions, but a couple of hours with an accountant right now is a) tough to get, b) expensive, and c) 3-4 years ago I had 'help' from an accountant with our withholding, and it didn't really help.
posted by anastasiav to Work & Money (14 answers total) 3 users marked this as a favorite
Is it related to my moving into a new tax rate bracket for Job B?

That was my first guess. Does your new job pay considerably more than the old one?
posted by jon1270 at 12:18 PM on January 28, 2014

Response by poster: Does your new job pay considerably more than the old one?

About 23% more, yes.
posted by anastasiav at 12:20 PM on January 28, 2014

How precise do you want to be? You paid pretty close to the amount of taxes you needed to pay last year - granted, you slightly overpaid the state and underpaid the IRS, but altogether you were only about $700 off, and presumably you paid thousands and thousands of dollars of tax last year.
posted by mskyle at 12:32 PM on January 28, 2014

It's not really entirely correct that moving into a tax rate bracket caused this problem, it's that the US tax system is progressive.

Each job will estimate your effective tax rate (which is always less than your tax rate bracket) and withhold at that amount unless you ask for additional withholding and/or claim fewer exemptions. Since you got paid more at Job B than Job A, your end of the year effective tax rate ended up higher than Job A estimated. As a result, Job A under-withheld given your actual effective tax rate. This can happen even if you stayed in the same tax bracket between Job A and Job B. The only variables that matters here is Job B pays more than Job A. This could also occur if your tax situation changed otherwise throughout the year (for instance, by no longer claiming the mortgage deduction), but that wasn't indicated in the original post.

In general, you should not assume the W4 form is sufficient to accurately estimate your taxes owed unless your tax situation is very boring (no kids, no mortgage, no investments, etc). As a result, it's expected to have to tweak the W4 occasionally to get accurate withholding.

For what it's worth, it's actually slightly beneficial for you to always pay a small amount of taxes every year because there's an opportunity cost associated with getting a refund. The opportunity cost is the interest you would have earned had the money sat in a bank account/brokerage account for the year rather than in the Treasury department. You don't want to pay too much taxes though; in general, underpayment of taxes can lead to tax penalties if the underpaid amount exceeds $1000.
posted by saeculorum at 12:35 PM on January 28, 2014

Since you got paid more at Job B than Job A, your end of the year effective tax rate ended up higher than Job A estimated. As a result, Job A under-withheld given your actual effective tax rate.

But most of the difference is in the state taxes, not federal. Maine only has a couple of tax brackets, and the only big jump in the rate is for income over $5,200 (individuals) or $10,450 (joint filing). The tax rate is zero below those thresholds, and 6.5% above. There's another bracket higher up the scale, but the jump there is much smaller. $365 of extra Maine taxes on $6500 worth of income is hard to explain this way unless Job A's accountant was calculating withholding on the assumption that the OP was going to earn very little during the entire year.

OP, how much state withholding shows on your W2 for your old job? What have you typically done to "readjust" your withholding?
posted by jon1270 at 12:58 PM on January 28, 2014

Response by poster: how much state withholding shows on your W2 for your old job?


What have you typically done to "readjust" your withholding?

It depends. This last time (2011-12) we fiddled around with the number of exemptions we were claiming, but prior to that, when I was actually working two jobs (one FT and one PT) I actually had a flat $6 additional withholding.
posted by anastasiav at 1:09 PM on January 28, 2014

how much state withholding shows on your W2 for your old job?


That's the problem. They were calculating withholding as if you were single / filing separately, and they didn't withhold anything for the first $5200, and they withheld 6.5% on the rest. Basically they way they calculated your withholding was as if it (the ~$6500) were going to be your only income for the entire year. It wasn't your only income for the year, so it was wrong. Happily this should iron itself out next year.
posted by jon1270 at 1:17 PM on January 28, 2014 [1 favorite]

I had this same problem many years back in Maine, and as stated above it tied back to employer incompetance. You can look at the tax schedule here and just do the math to see if you are having the correct amount withheld.
posted by selfnoise at 1:19 PM on January 28, 2014

If you want to solve this problem forever, both of you should change your withholdings to Single with 0 exemptions. This means the maximum allowable tax will be withheld from your paychecks, and every year at tax time you will get a big fat return.

Now, somebody is going to jump on here and tell you that this is terrible advice, for a variety of reasons. However, you never owe when it comes time to file your taxes, and you always get a return.
posted by The Blue Olly at 1:48 PM on January 28, 2014 [1 favorite]

Withholding keeps your money in an escrow somewhere for months paying you no interest. If you have the grit to do it, you could reduce your withholding to a reasonable minimum, put your funds some place interest bearing, and be prepared to pay a lot before the next April 15. The interest you gain would offset some of the pain.
posted by Cranberry at 1:49 PM on January 28, 2014

Recognize that a tax return is the result of too much of your money being in escrow at no advantage to you. The amount you get back is not a present; it is your money being used for months by a government instead of you.
posted by Cranberry at 1:52 PM on January 28, 2014 [1 favorite]

Is it possible that your gross income when adding both jobs caused certain credits to phase out, thus resulting in the sharp increase in tax liability?

Each job only knows about that job and withholds as if that is your only income. If your annual income at job B is $20,000 and you put married with 2 exemptions, it's going to withhold practically no tax, because it will assume you have a 12K standard deduction and 2 personal exemptions, putting your small remaining taxable income into the 10% bracket. But, when that 20K is additional income on top of another, say, 50K income after deductions, then it's taxed in full at 25%. The 20K job doesn't know about the other job.

The easiest way to plan your W4 (and ME state withholding form) is to just follow the instructions on the form. They cover a number of situations and are very clear if you just go step by step.

However, if you just put Married 0 (or Married, but withhold at higher single rate, 0, if you want to be really safe), then you will 9 times out of 10 receive a refund. Yeah yeah, 0% loan to the government blah blah blah. But (a) you're required to pay at least quarterly, so you can't hold on to the funds for a full year and (b) you'd want it in safe/stable savings, so you're looking at maybe 2% APY if you're lucky.

TL;DR if you want a large tax refund, advance more money to the IRS/ME Revenue Dept.
posted by melissasaurus at 1:59 PM on January 28, 2014

I don't think you need to be radically changing anything. What you should be doing is checking your paystubs at the end of each quarter to make sure that enough state tax has been withheld. If not, then one or both of you should increase your withholding slightly (by decreasing the number of dependents you claim by 1). Then check again the next quarter. This could take more than one year to balance out, but then you'd be balanced until you had any further changes.

How do you estimate what you should be paying in state taxes? The key here is to know this is an estimate and not an exact science. The two of you should ensure that you are paying at least 1/4 of 2013's state tax bill each quarter of 2014 and add some padding (five percent?). Your state tax bill is whatever was taken out of your paychecks in 2013 plus the $452 you still owe. If your income has gone up, estimate how much more you will make in 2014 and multiply that by your marginal state tax rate. Add 1/4 of that extra amount to your quarterly goal amount.

Don't get too concerned about giving the government an "interest free loan". Interest is not very high these days. Unless you are carrying debt, you're not losing much money.
posted by soelo at 3:09 PM on January 28, 2014

Cranberry - I know all of that. However, I feel that I get an awful lot from the government, and letting Uncle Sam have the miniscule amount that an interest bearing account might generate bother me.

It's a shitty savings plan, but it's one that works for me. And unlike the OP, I never get an unpleasant surprise at tax time.
posted by The Blue Olly at 10:46 AM on January 30, 2014

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