HELP REQUEST: 30% Wage Increase - Federal Tax up 80%, State Tax up 300%

[Tonyahu]

Greetings,

I am a recent graduate that just got my first raise and am alarmed at the tax increase. I must be looking at this wrong but am hoping someone can clarify.

Previous:
Hourly: $13.75
Gross Paycheck: $1099.66
CA State Income Tax: $6.56
Federal Income Tax: $66.53

After Raise:
Hourly: $17.50
Gross Paycheck: $1404.36
CA State Income Tax: $22.15 (up 300%)
Federal Income Tax: $118.49 (up over 80%)

I did lower my 401k contribution from 12% to 6% due to allocating capital differently, but I would assume this shouldn't change anything. I should be in the same tax brackets regardless of raise and 401k change.

Thanks!

[Proud Foot]

Hard to really tell without knowing your full tax situation (M/S, W-4 Allowances, Pretax Payroll Deductions) but based upon the numbers you presented your California taxes increased to 1.58% of gross from 0.6% while your federal increased to 8.44% from 6.05%. I do not know anything about California taxes, but with your raise and reducing your 401k the federal tax does not look out of line.

[Tonyahu]

Hard to really tell without knowing your full tax situation (M/S, W-4 Allowances, Pretax Payroll Deductions) but based upon the numbers you presented your California taxes increased to 1.58% of gross from 0.6% while your federal increased to 8.44% from 6.05%. I do not know anything about California taxes, but with your raise and reducing your 401k the federal tax does not look out of line.

If I went back back to 12% 401k would that bring me back down to ~6%?


Federal Income Tax = Single w/ 2 claimed allowances.

CA State Income Tax = Single/Married 2 or more incomes w/ 2 claimed allowances.

This is actually false, I only have one income. Is that an issue?

[MDM]

If I went back back to 12% 401k would that bring me back down to ~6%?

Federal Income Tax = Single w/ 2 claimed allowances.

Assuming 26 * "gross paycheck" is the annual income, filing single with 2 exemptions (see the case study spreadsheet) gives the following for (annual federal tax)/26:

Previous   
no 401k       $63.65
6% 401k     $47.16
12% 401k   $36.16
   
After Raise   
no 401k     $109.36
6% 401k     $96.72
12% 401k   $84.08

[Tonyahu]

If I went back back to 12% 401k would that bring me back down to ~6%?

Federal Income Tax = Single w/ 2 claimed allowances.

Assuming 26 * "gross paycheck" is the annual income, filing single with 2 exemptions (see the case study spreadsheet) gives the following for (annual federal tax)/26:

Previous   
no 401k       $63.65
6% 401k     $47.16
12% 401k   $36.16
   
After Raise   
no 401k     $109.36
6% 401k     $96.72
12% 401k   $84.08

Thanks a ton, friend. The calculations you have are still off from my paycheck though (looks like I am paying more), what could be the reasoning for this?

[MDM]

...what could be the reasoning for this?

See 2017 Publication 15 - p15.pdf for probably all (more than?) you'll need to know about withholding.

As long as the amount withheld is close to your eventual tax due, all is well.

[Proud Foot]

Hard to really tell without knowing your full tax situation (M/S, W-4 Allowances, Pretax Payroll Deductions) but based upon the numbers you presented your California taxes increased to 1.58% of gross from 0.6% while your federal increased to 8.44% from 6.05%. I do not know anything about California taxes, but with your raise and reducing your 401k the federal tax does not look out of line.

If I went back back to 12% 401k would that bring me back down to ~6%?


Federal Income Tax = Single w/ 2 claimed allowances.

CA State Income Tax = Single/Married 2 or more incomes w/ 2 claimed allowances.

This is actually false, I only have one income. Is that an issue?

It looks like MDM has given you a lot of good information. Is the difference because your 401k is possibly a Roth 401k (post-tax) and MDM is calculating it like a Traditional (pre-tax)?

As far as your last question: for CA State income tax I read it as Single (OR) Married 2 or more incomes.  And you can fill out your W-4 however you want as long as enough is withheld at the end of the year to not incur a penalty for under withholding.

[kendallf]

If I went back back to 12% 401k would that bring me back down to ~6%?

Federal Income Tax = Single w/ 2 claimed allowances.

Assuming 26 * "gross paycheck" is the annual income, filing single with 2 exemptions (see the case study spreadsheet) gives the following for (annual federal tax)/26:

Previous   
no 401k       $63.65
6% 401k     $47.16
12% 401k   $36.16
   
After Raise   
no 401k     $109.36
6% 401k     $96.72
12% 401k   $84.08

Thanks a ton, friend. The calculations you have are still off from my paycheck though (looks like I am paying more), what could be the reasoning for this?

Something that nobody's pointed out explicitly yet, that you may or may not be aware of: your withholding does not equal your end of year tax burden, necessarily or even commonly.  Your total tax rate after exemptions does not equal your marginal tax rate, and the withholding change is calculated essentially at your marginal tax rate.  Additionally, the tables make no allowance for a mid-year increase; i.e., they calculate as if you'd been receiving the higher rate for the full year.

Your deductions and exemptions haven't changed, only your gross income, so the increase will be taxed at your top rate, probably 15% judging from your hourly rate.  This can make your withholding increase look like a lot if your exemptions/deductions previously had you near an effective tax rate of zero.  This is especially true if you previously would have gotten the earned income credit, that sort of thing.

If your tax situation is fairly simple, the withholding is likely to be close going forward; if you received a raise mid-year, you'll get some money back when you file at least this first year.  You can use tools like Taxcaster to forecast it, and adjust as necessary.

https://turbotax.intuit.com/tax-tools/calculators/taxcaster/

[MDM]

You can use tools like Taxcaster to forecast it, and adjust as necessary.

TaxCaster can work, and many do use it.

It has what could be significant holes, however, for someone in the OP's position, e.g., ignoring the saver's credit.

See Best paycheck/withholding calculator(s)? for more discussion.

[SeattleCPA]

The other thing possibly (surely?) going on here is that the taxpayer was originally not paying much income tax... and then with the bump in income now taxpayer now pays a bit of tax.

This is what happens, in general, with a progressive tax. Someone with an average household income may easily pay zero income taxes. Someone who makes, say, $10K or $20K more than the average may pay $2K to $5K in income taxes.

Expressed as a percentage increase, that bump in taxes from nearly zero or zero to $2K or $5K may seem huge. But another way to look at it is, the earlier tax burden was artificially low.

[soupcxan]

Welcome to the world of paying for all the "free" stuff the government provides!