Help me undersand taxes. Where did my refund go?
February 22, 2014 8:30 PM   Subscribe

I need help understanding taxes. I have a very standard tax situation, with two W2s as a result of a mid-year job change. I left Job A three weeks into January 2013 and started Job B two weeks afterwards. I entered my info into TurboTax. Job B: ~$800 refund. Job A: ~-$800 refund. Now I'm back at 0. I'm confused and disappointed, and apparently I don't have any ideas how taxes work.

When I started Job A, I didn't know what I was doing, and I declared 3 allowances on my W4. I am single and renting, so this was a mistake, and last year I owed the IRS ~$1000. I never updated my W4, but when I started my new job, I made sure to keep my allowances at 1.

After entering my Job B W2 into TurboTax, I was excited to see that I was getting a refund of ~$800. I then entered my Job A W2 in, and I watched number go all the way back down. In fact, now I owe the state of VA $40. Last year, I owed $30.

So now I'm confused. I obviously didn't pay enough in taxes at Job A, but .. $800 worth? For one month? How come last year I owed $1000 from Job A's withholdings and this year I'm owing $800? And Why do I owe more in state taxes? What would have happened if I had worked at Job A the entire year?

For an idea of how much I made, at Job A, I made ~$60,000, and at Job B, around $70,000. Furthermore, I probably got around $500 from unused leave after separating from Job A.

I know YANMA, so I am just looking for a very high level explanation on why this is possible. I feel like I am missing some very fundamental knowledge on how all of this works, and any clarification would be appreciated.
posted by anonymous to Work & Money (14 answers total) 4 users marked this as a favorite
Get the form and booklet and do it by hand. If you really just have 2 W2s and nothing else hinky it'd be (fairly) easy and you may get a handle on what is happening.
posted by edgeways at 8:35 PM on February 22, 2014

What's happening is that both jobs were withholding as though you were going to work there the whole year. So for either one of them, if you only consider half a year's pay, you are in a lower tax bracket and have to pay a smaller percent. But in fact you basically worked the whole year, so once you say that, your tax rate readjusts and is now roughly the same thing you had withheld.
posted by aubilenon at 8:41 PM on February 22, 2014 [1 favorite]

In other words, job A was withholding the correct amount of money.
posted by aubilenon at 8:42 PM on February 22, 2014 [1 favorite]

How much total tax was deducted at job A at the time the paychecks were issued?
posted by Dansaman at 9:25 PM on February 22, 2014

Think of it this way: imagine for a second that your salary had been $70k at both jobs, and your withholding was set up correctly at both. In that scenario, each job would have withheld, each month, the appropriate amount for someone with one allowance making $70k. At tax time you would therefore expect a refund of close to $0. I don't know what the exact effective tax rate is for $70k but for the sake of argument, let's say that it's 15%. (And let's pretend that includes payroll taxes, etc., so we're only worrying about one number.)

Continuing this scenario, you enter the information from your second W-2 (the one for 11 months). On this W-2 it shows that you have paid 15% of $64k. But 15% is too high for someone making only $64k; at that salary your effective rate should only be, let's say, 14%. So TurboTax says you are owed a refund of ~$800.

Now you enter your first W-2 (the one for 1 month). Looking at both W-2s combined, you have paid 15% of $70k, which is exactly right. So now TurboTax shows $0.

The difference between this pretend scenario and yours is:
-Your second W-2 withheld slightly too much because you only made $69k this year, not $70k. (Since you made less in January.)
-Your first W-2 withheld too little because of the allowances and because you made $69k instead of $60k. But although this withholding was way off it was only for a month so the overall effect was small.

Both of those points result in only a small change so you still wound up close to $0.
posted by equalpants at 9:25 PM on February 22, 2014 [4 favorites]

In the hypothetical scenario I should have mentioned what would happen the other way, too.

Let's say you enter the one-month W-2 first. It shows that you have paid 15% of $6k. But 15% is way too high for someone making only $6k. So TurboTax says you are owed a huge refund.

Now you put in the 11-month W-2. Again, with both of them combined you've paid 15% of $70k which is exactly right, so TurboTax shows $0.

The point is, it's not true that one job is giving you a refund and the other is making you owe. It's that the refund TurboTax shows after entering just one W-2 is going to be too high--no matter which one you enter first.
posted by equalpants at 9:43 PM on February 22, 2014 [3 favorites]

When you entered the W-2 for Job A, did you enter the correct number for Box 2, Federal withholding? I'm guessing that this should have been about $700 for one month. If you had too many allowances, then withholding was too low.
posted by JackFlash at 11:09 PM on February 22, 2014

equalpants is right. I've used TurboTax for years and used to get mad at my husband for doing his W-4s wrong because every year when I entered his info our refund disappeared. I finally caught on a few years ago that it's just his income pushing us into a higher tax bracket, so that in reality the refund would disappear no matter whose W-2 went in first. It's confusing how they show you that in-process number - to really make things clear they need to not give you an estimate until all your income and withholdings are entered.
posted by something something at 5:05 AM on February 23, 2014 [2 favorites]

An important fact that other commenters have hinted at, but not fully explained is that income taxes are progressive. This means that when your income increases, you pay a larger percentage of that income as taxes. To apply this to your situation, the 60-70K you earned at job A or job B alone would put you in a tax bracket where you pay 15-20% (don't take this number too seriously, I got it by skimming last years tax table and the actual math is complicated) but the 130K you earned at the two jobs together would put you in a bracket where you pay more like 20-25%. (same caveat as before) So if, for example, you had 21% of your income withheld from both job A and job B, when you filled out your return with only the income and withholding from one of the jobs, it looks like you withheld too much (refund), but when you combine the income and withholding from both jobs, it now looks like you withheld just the right amount (no refund).
posted by martinX's bellbottoms at 7:42 AM on February 23, 2014 [2 favorites]

One thing to look out for in a two-job year is exceeding the social security maximum. If you earned over $110,000 or so gross for both jobs (or for one, before you switched), the amount of social security tax withheld from you on the excess is refundable. This is an "uncommon" credit / refund and depending upon the dialog / options you may have clicked it might not be captured.
posted by MattD at 9:45 AM on February 23, 2014

For an $800 difference, it might be worth going to a local tax preparer who can sort out the difference and provide advice on how to get some or all of that back.
posted by nalyd at 9:58 AM on February 23, 2014

his income pushing us into a higher tax bracket

This terminology needs to be banished, because it carries a strong misunderstanding of how taxes work. It's important to carefully read the rate schedule. It's not that you are "bumped up" a bracket, it's that computing your tax and then adding more income is going to make that income appear to be taxed at the rate for that bracket, instead of the much lower effective rate for your income overall.

I'm going to try for an explanation with the fewest words (update: this got long). The first 60k of income you enter into your tax software will have a low effective tax rate, because it's going to soak up the standard deduction and the low rate portion of the rate schedule. E.g., if I only earned $5k, my effective rate is 0% because of the standard deduction. If I only earned $15k, it's a few percent.

Now, say I've entered 60k worth of income, and I get an effective tax rate of ~10% (because of all those deductions, and the first 36k above those deductions being taxed at ~13%). Each additional dollar on top of that is taxed at the rate appropriate for the $60k tax bracket: 25%. Now your job wasn't expecting you to be taxed at 25% of your total income from that job, so they set the withholding according to the expected effective tax rate, which is more like 15%.

Worked example (and only an example!):

Income: $60k
Personal exemption and standard deduction -$10k.
Taxable income: $50k
The rate schedule says: If your taxable income is between $36k and $87k, tax is $5k + 25% of the amount over $36k.
Your tax: 5k + 0.25*(50k - 36k) = 8.5k
Your effective tax rate: 8.5k/60k = 14%

(Repeat: this is only a trivial example and you should really follow the 1040 instructions carefully!)

Now, if I add another $5k, how much more tax do I owe? It's not 14% of $5k, it's 25%. The difference is about $500. Both jobs would have withheld at your expected effective rate (15%), which is why it looks like it's not enough withholding when you add Job A separately. They both expected you to have a total of 12 months of income. And they were right to do so; you did have ~12 months of income at a similar pay, so your withholding ended up matching your tax, which is how it's supposed to work. Another way to put it is that if you worked for 12 months at one job, but somehow got a W-2 for 11 months and a separate W-2 for one month, you'd see the exact same "disappearing" refund.

Bottom line is that (Tax owed on Job A) + (Tax owed on Job B) does not equal (Tax owed on Job A+B). Withholding (and tax in general) is set based on your expected total income and total tax, which makes it look counterintuitive if you compute your tax on just a fraction of that total income.
posted by kiltedtaco at 10:59 AM on February 23, 2014 [1 favorite]

MattD is correct in general that working two jobs can result in excess Social Security tax withholding, but is incorrect that this could be the case here. Anonymous moved (in February 2013) from a job paying $60,000 per year to a job paying $70,000 per year; that won't get the total salary in 2013 to be over $110,000.

And TurboTax handles this situation automatically, anyway, assuming that the Social Security taxes withheld, as reported on the two W-2s, were entered correctly. There isn't any way to "click" on something, in TurboTax, that will cause it to mishandle this.

It's definitely NOT worth paying even $100 to a tax preparer to chase down a non-existent $800 refund. If you don't trust TurboTax, take an afternoon off and get your taxes done by the AARP/TCE/TaxAide program - it's free, and there are no age limits for those who use their services. (There also is no income limit, technically, but at over $250,000, various tax provisions kick in that are "out-of-scope".) Mid-March is a good time; the February rush of those expecting refunds is over and the April rush of procrastinators hasn't started.
posted by WestCoaster at 9:39 PM on February 23, 2014

at Job A, I made ~$60,000
I assume that is your yearly salary and not what you made in the 3 weeks you actually worked at Job A in 2013. If 60K is your yearly rate, you made about $3,460 for the three weeks you worked there in 2013.

Assuming your marginal tax rate is 25% (which it would be if your taxable income is between $36,250 and $87,850), $800 is close to the entire amount you would owe in Federal taxes for those three weeks. How much Federal tax was withheld by Job A? How much by Job B? Make absolutely sure you entered all amounts from both W-2s correctly.
posted by soelo at 9:30 AM on February 24, 2014

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