Tax penalty — why is this not automatic

[Anonymous]

We are dual income W3 employees; I make $180k and spouse makes $320k.

This year we owed $20k at tax time, and even got dinged with a few hundred penalty.

Why is this? Prior years we are fine; our income went up but I assumed what was withheld would march up with salary.

I’ll increase my withholding with extra contributions but unclear why it doesn’t just adjust automatically— what we did we set up wrong? We are scientist/tech, so the whole tax and finance thing is outside our wheelhouse.

[Anonymous]

*W2

[Anonymous]

You need to adjust your W-4 withholdings to account for both of you being high income. It's a confusing worksheet, but if you follow the instructions (especially the parts about spousal income) it will account for everything properly.

[Anonymous]

Anonymous wrote:You need to adjust your W-4 withholdings to account for both of you being high income. It's a confusing worksheet, but if you follow the instructions (especially the parts about spousal income) it will account for everything properly.

I did this before but unclear why it didn’t adjust automatically?

[Anonymous]

It doesn't adjust automatically because your employer doesn't know what your spouse is earning.

[Anonymous]

Anytime you want to make a change in your withholding, you need to file a new form with the new information. Otherwise, the last W-4 you filed stays in effect. Only you can change your form.

[Anonymous]

https://www.nerdwallet.com/article/taxes/federal-income-tax-brackets

Looks like you're in the 22% tax bracket and he's in the 24% and neither of you would have changed with your individual raises. Combined, you're in the 35% bracket, but your employer doesn't necessarily know that (that bracket starts at 462,501 so with your raises, you might have just crossed into it this year). Also, you guys probably have dividends and interest contributing to HHI.

[Anonymous]

Oh and the reason it's not automatic? So Intuit can earn massive profits off of selling TurboTax every year.

The IRS could quite easily calculate your taxes owed automatically and send you a filled out form to review and confirm. Obviously if things were off one year they could adjust the withholding with your employers systems.

That's the way it's done in most other industrialized countries. But Congress (mostly Republicans) won't let them because of lobbying/contributions by Intuit.

[Anonymous]

Anonymous wrote:Oh and the reason it's not automatic? So Intuit can earn massive profits off of selling TurboTax every year.

The IRS could quite easily calculate your taxes owed automatically and send you a filled out form to review and confirm. Obviously if things were off one year they could adjust the withholding with your employers systems.

That's the way it's done in most other industrialized countries. But Congress (mostly Republicans) won't let them because of lobbying/contributions by Intuit.

https://www.propublica.org/article/inside-turbotax-20-year-fight-to-stop-americans-from-filing-their-taxes-for-free

[Anonymous]

Anonymous wrote:

Anonymous wrote:You need to adjust your W-4 withholdings to account for both of you being high income. It's a confusing worksheet, but if you follow the instructions (especially the parts about spousal income) it will account for everything properly.

I did this before but unclear why it didn’t adjust automatically?

Did you have a bonus? We have worked for multiple companies where the "bonus" is legally taxed at 20% despite the fact your base income puts you into a much higher tax bracket. So if you don't adjust, you will be underwitheld

[Anonymous]

Anonymous wrote:https://www.nerdwallet.com/article/taxes/federal-income-tax-brackets

Looks like you're in the 22% tax bracket and he's in the 24% and neither of you would have changed with your individual raises. Combined, you're in the 35% bracket, but your employer doesn't necessarily know that (that bracket starts at 462,501 so with your raises, you might have just crossed into it this year). Also, you guys probably have dividends and interest contributing to HHI.

Haha, sadly no dividends or interest, all our money goes into the mortgage and college costs…

[Anonymous]

The amount withheld will march up with your salary, and your spouse's withholding will march up with their salary. The problem is that your company doesn't know what your spouse earns, and their company doesn't know what you earn, so they don't know the combined tax rate. As you both get raises, you can collectively bump up into a new tax bracket, and also start to phase out some deductions (child tax credit, etc), but neither company will know that. So you have to manually adjust your withholdings to account for the combined increase, not just your own.

[Anonymous]

I'd love to know how 2 people making a total of $500k a year can't figure out their taxes. What line of work are you in that you make so much but can't figure this out?

In any case, I always schedule a mid year tax review to review current withholdings and make sure we'll have enough to cover the bill by year's end.

[Anonymous]

Anonymous wrote:We are dual income W3 employees; I make $180k and spouse makes $320k.

This year we owed $20k at tax time, and even got dinged with a few hundred penalty.

Why is this? Prior years we are fine; our income went up but I assumed what was withheld would march up with salary.

I’ll increase my withholding with extra contributions but unclear why it doesn’t just adjust automatically— what we did we set up wrong? We are scientist/tech, so the whole tax and finance thing is outside our wheelhouse.

How would your employer know your spouse's salary?

[Anonymous]

How about your investments? Savings account interest was way up this year. Capital Gains. You can. Not expect your W2 withholding to know anything about that