- May 20, 2024
- Posted by: legaleseblogger
- Category: Related News
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## Dealing with Unexpected Tax Consequences
Total first world problem, my spouse and I made more money than expected this year (raises and bonuses) and crossed into a new tax bracket. I thought we were safe as our W-4s are set not to claim any deductions despite having kids and student loans. I guess we needed additional withholdings.
Our tax situation is not complex. We are both W-2s, have a modest, but inactive (most holdings are long) stock portfolio, and a few other small investments. In the past I have used TurboTax and gotten a return each year even with a household employee who we did not use this year. TurboTax has us owing this year and I think a large part is not being able to get credits and deductions we have gotten in the past because our AGI passed the caps. Should we look at hiring a CPA?
To be clear, our goal is not to get a return, I just don’t want to owe.
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Tax brackets are marginal. You only pay more taxes on dollars earned above the tax bracket threshold.
If you haven’t already – can still contribute to a tIRA to lower your adjusted gross income.
https://www.nerdwallet.com/article/taxes/federal-income-tax-brackets
If you had less withheld than you owe there isn’t anything a CPA can really do except charge you an extra $500 to tell you that you owe the Feds….
My accountant: “More money is always more money.”
It seems that your higher AGI has caused you to lose credits/deductions that you have gotten in the past. You may not be able to do anything about taxes on 2023 income; however, funding a 2023 IRA in 2024 will lower your AGI. Look into that to see if you’re eligible.
Going forward, learn how you can reduce your AGI for 2024 taxes. Increased 401k withholdings, HSA contributions, IRA contributions are a possibility.
A CPA is unlikely to tell you anything new. It’s totally normal to owe if you have two substantial incomes, because the default W-4 algorithm underwithholds in that situation – and yes, that means next year you’ll need to set additional withholdings. You’re not going to avoid owing unless you find some new deduction that you previously missed, and Turbotax is already pretty good at searching for those. The IRS will charge you interest on the amount you underwithheld if it’s more than 10% of the total tax, but it’s a reasonable formula and Turbotax will give you a choice between calculating it during tax return time or waiting for the IRS to bill you.
(as other commenters have said, a traditional IRA is a great choice in this situation – but only if you don’t already have a 401k at work, as that makes you ineligible for a traditional IRA)
Not really needed. If it’s not complex, it isn’t worth using a CPA. And definitely don’t use HR Block, I can’t tell you how many returns of theirs we had to fix when I worked in public accounting. If you want a CPA, find somebody local. They won’t charge you an arm and a leg and someone with good experience will be much better than the Block
At my company (typical large corporation) I can just log on to the HR self-service site and increase my withholding by any dollar amount I want.
This gives you a great estimate of what you should do to minimize your refund/owe as small as possible.
You can even include bonuses you anticipate too.
https://www.irs.gov/individuals/tax-withholding-estimator
You’re using an old W4 if you are or aren’t claiming allowances. The new ones don’t have that “enter 1 for yourself“ list. Have you been with the same company since 2021?
The new ones use the IRS calculator and are like a mini tax return but are very accurate.
If you’re eligible for IRA contributions you can reduce your taxable income for 2023 until April 2024. It could reduce your taxable income to the lower bracket. I would do some googling on that.
So you really should look at what you selected for withholding a. Yes you claim married, but there are married options.
When I got married (no kids no student loans) we have (still have similar incomes). First year we owed $7k. I paid a CPA to do mine figuring I messed up and it was to the penny what TurboTax told me. This was in 2019, filing for 2018.
I couldn’t get an answer from the CPA that clicked as to how we messed up that badly, so I researched on my own. This is what I learned. The “married filing jointly” assumes one party makes significantly less. My husband and I make within 10% of each other.. I also learned there is a “married withhold at higher single rate” option when both parties earn about the same amount. Once we switched to that, we stopped owing.
Now bc of these raises and your bonuses, you might have run into the same issue we ran into.
Use the IRS withholding calculator a couple times a year to make sure you’re on track, especially after bonuses that may not have had enough withheld or big changes to income. https://www.irs.gov/individuals/tax-withholding-estimator
No Turbotax knows what to do. Tax preparation companies are a scam.
I know this isn’t what you asked about but figured I’d share for clarity sake. In past years you have received a tax REFUND, not a tax return. The tax return is the 1040 which you file with the IRS. Sometimes that return shows that you are owed a refund. But you file a tax return every year.
Just because it’s a common misconception.
Good news! You don’t seem to understand how marginal tax brackets work! Making more money didn’t mean you owe the higher rate on ALL your income, just the amount above that threshold. Go out and make as much as you want!
I think you should pay a real CPA to do your taxes this year. Then you’ll know if it is worth it to use in future years.
I wouldn’t worry about brackets just for that sake. Where you want to manage brackets is if you’re moderate income and can take advantage of 0% capital gains, or trying to do retirement conversions from traditional to Roth.
How much into the next tax bracket did you go? Only that amount will get taxed at the higher rate
You’ll be able to deduct more then 29,200? (Standard deduction)
Which credits and deductions do you think you’re no longer eligible for? Most means tested credits phase out with higher incomes to avoid warped incentives
I first read this as “Our Artificial General Intelligence crossed…”
For this year there is likely nothing you can do unless eligible for trad deductible IRA contribution which if your income is high likely is not the case.
In the future you should increase your 401(k) contributions and make them trad (pre-tax) if they are currently Roth.
Increasing withholdings will avoid having to pay at return time but will do nothing about deductions and credits being phased out due to MAGI being too high. 401(k) pre-tax contributions will directly lower your taxable income.
Check if your company has a deferred compensation plan. This is only a good idea if you’ll be in a lower tax bracket and/or you think the tax rates will be lower in the future. Also check the investment options and fees for the plan.