Tax penalty — why is this not automatic

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

I guess I didn't really appreciate that we had moved from individual tax rates of 22% into combined tax rates of 35%... I mean we are still DCUM middle class and feel like we barely can afford living (expensive house, college costs, and generally we have invested too conservatively so no huge savings). Being 10% higher in tax bracket just wasn't on our bingo card.

You aren't paying 35% of your income to taxes, just FYI.

Taxes are assessed in brackets. For 2024: you'll pay the following if you are married filing jointly:

10% for the first $23,200
12% for any income between $23,201 to $94,300
22% for any income between $94,301 to $201,050
24% for any income between $201,051 to $383,900
32% for any income between $383,901 to $487,450
35% for any income between $487,451 to $731,200

So if your taxable income is $500,000 (it probably isn't, though, if you are putting anything away in retirement) you are only paying 35% taxes on the amount that is over $487,451

500-000-487,451= $12,549 and 35% of that = $4392.15. That is about $4,000 that you are paying in tax just because your income hit the 35% tax bracket.

The difference is 3% of 12549....the rest would already be at 32%. So $376 extra in taxes for hitting the 35% bracket. That is clearly not the issue

Okay, OP, being in science/tech is no excuse for not being able to do basic taxes. Both my spouse and I are in IT and we manage to handle out taxes fine and have for the 22 years that we've been married.

For the PP, they are not being taxed 32% on the money under the top bracket.

OP is currently paying
10% for the first $23,200 = $2320
12% for any income between $23,201 to $94,300 = $8531.88
22% for any income between $94,301 to $201,050 = $23,484.78
24% for any income between $201,051 to $383,900 = $43,883.76
32% for any income between $383,901 to $487,450 = $33,135.68
35% for any income between $487,451 to $731,200 = $4392.15 (assuming $500K)

Total = $115,748.25 = 23.15%

This is the way bracketed tax brackets work. You pay lower percentage on the lower brackets and only pay the higher percentage on the income over the bottom threshold.

OP, the main reason you owe extra money is most likely because you bumped into the higher tax bracket and your companies did not know that your combined income moved to a new bracket.

What I do is after I file my taxes, if I owe money on the previous year, I calculate the amount I owed, round up (assuming you expect an annual raise) and divide by 26 pay periods (if paid bi-weekly) or 24 pay periods (if paid semi-monthly) and then my spouse and I divide that in half and we both file a new W-4 and add the amount to our withholdings. I keep PDF's of my W-4 on my laptop where I do the taxes and I can compare with last year's withholding to make sure that I get the right amount withheld based on this year's filing.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote: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.

I mean, my spouse is in tech working on mobile apps, and I work at a biotech company as a scientist -- tax and finance is just not something we think about much; I updated withholding a few years ago following the formula, I just thought it would not require an annual adjustment.

BTW, Turbotax didn't notify we had a penalty, I only noticed it when reviewing the PDF -- I probably paid in years past blissfully unaware of the cost.

No one's asking you to formulate federal tax and fiscal policy, OP. This is basic, fundamental personal finance that every adult needs to know. If theater majors across the country can figure out their taxes every year, it's likely you can too. Just pay attention.

NP. I'm not sure why the PP needs to criticize you so much. If this is not your strong suit, it is not a character flaw.

I can identify with OP. In the past, we were also in the position of owing money on 4/15, and it was not fun. Like OP, we had similar income, but it was a relatively recent development. We were primarily just wage-earners. (And we did not have passive income, capital gains, etc.)

Once you get to a higher income level (where you are), you could consider doing quarterly estimated taxes, rather than just relying on adequate withholding by your employer. That way, you are pretty sure you'll know that you are covering your taxes. This will come in handy once you are able to start having some passive income, and get beyond just being wage-earners (which we are in the process of trying to do).

[Anonymous]

Looks like OP isn't the only one having these sorts of issues.

https://www.politico.com/news/2024/04/15/tax-fewer-people-getting-refunds-00152248

"The new method is a less blunt approach towards withholding that takes into account more information about people’s individual circumstances.

It’s also a lot more confusing, requiring people to essentially do a mini-tax return to estimate their withholding.

The IRS has posted an online calculator to help people navigate it, but practitioners say it has befuddled many taxpayers, if they’ve even realized there is a new withholding system — another reason why people may be surprised this tax season.

“It was intended to be far more accurate, but it is admittedly daunting,” said Pete Isberg, a vice president at the payroll processor ADP."