I Owe How Much?
For the past few years, we relied on my husband’s start-up business losses as a “saucepreneur” to offset any tax payment shortages throughout the year. In 2021, that strategy failed, for a number of reasons.
It never occurred to me that we would have any issue with underpaying our taxes. I had heard, though, that people were lamenting their much lower refunds this year. Here is what I learned, and how I addressed our own situation.
First, some (recent) history. The Tax Cuts and Jobs Act (TCJA) of 2017 resulted in a significant change in federal income taxation, as it removed personal exemptions and increased the standard deduction. Since the old Form W-4 used allowances that were tied to exemptions for deductions on the tax return, it was no longer relevant under the new system. In addition, the IRS changed withholding tables that employers use to calculate withholding.
The new W-4 form is simplified in some respects, but leaves a lot of the decision-making in your hands. For example, if you are married and your spouse also works, or if you have more than one job, there are three different ways to figure out your withholding. If the two jobs have similar earnings, then you can just check the box and move on. Otherwise, you will want to use a W-4 withholding calculator or the worksheet provided with the form. The new W-4 assumes you take the standard deduction, but allows you to add any itemized deductions, if applicable. The last section lets you add extra withholding from your paycheck, if you are unsure about your results, or have some other reason for doing so.
In our case, my husband had very little Federal income tax withheld from his part-time W2 earnings in 2021. It was shockingly low when we finally looked at it, resulting in the underpayment.
This prompted us both to wonder about our situation in 2022. I don’t recall doing a calculation when he started his new full-time gig, and I’m pretty sure I hadn’t updated my withholding in quite some time. So, armed with our most recent paystubs, I used the IRS withholding calculator, which suggested that we were on track to owe a significant amount to the IRS in 2022. And while we might be able to rely on business losses to offset, I preferred to be optimistic and assume that he may breakeven for once. So, I added extra withholding to my pay and will do another calculation at the end of the summer.
The ultimate goal of payroll withholding is to both not under pay your taxes, and also not give the government a tax-free loan. So, if you haven’t given your withholding a second thought in the past few years, I recommend using the IRS withholding calculator and making any adjustments now, before it becomes an amount that you will have to rely on savings to pay at tax time.
By Kristan Anderson, CEBS®, CIMA® | Dir. Of Retirement Plan Services & Dir. Of Financial Planning
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