Author Topic: You're probably under withholding for your 2018 taxes  (Read 5633 times)

terran

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You're probably under withholding for your 2018 taxes
« on: February 26, 2018, 11:23:01 AM »
The Wealthy Accountant (MMM's accountant FWIW) has found that every one of his clients that he has met with since the new withholding tables were implemented by employers is under withholding for next years taxes, so it seems pretty likely that a number of people here are as well.

His suggested solution is to hire an accountant, even if you don't normally use one, to help you figure out your withholding, which doesn't seem quite necessary to me, so I thought I'd write up a little primer on making sure your withholding is right regardless of what form W4 is calculating as the "correct" number of allowances.

Also note that I think @MDM's case study spreadsheet can do a lot of this for you.

Onward...

Step 1: Figure out how much you want to withhold

Option A: Withhold enough based on your 2017 tax liability that you won't owe a penalty.

The advantage of this is that you can figure out exactly how much you need to withhold so you won't own a penalty. The disadvantage is that you still might owe something in 2018 if you make more money or the new tax bill effects you unfavorably. The other disadvantage is that you might overwithhold (give the government an interest free loan) if you make less money or the tax bill effects you favorably.

You can find your 2017 tax liability (this is not the amount you owed or received as a refund, this is your total tax liability regardless of the amount you paid during the year) on line 63 of your 2017 Form 1040.

As long as your total withholding in 2018 is at least 100% of the amount on line 63 (110% if your AGI, found on Form 1040 line 37, is under $150k) of the amount found on line line 63, then you may owe tax (or get a refund), but you will not owe a penalty.

Option B: Withhold near enough what you will owe in 2018 that you won't owe a penalty. 

The advantage of this is that you won't owe a penalty and you'll pay pretty close to what you owe, so you will neither owe a large amount, nor give the government a large interest free loan. The disadvantage is that it will be a little while before there are 2018 tax calculators available, and the DIY version (below) will only work if you have a pretty simple tax situation, so this option is somewhat "dangerous" in that if you badly miscalculate you may owe a penalty.

If you have a simple tax situation, then you can probably get a pretty good estimate of your 2018 tax liability by guessing what your income after deductions (like health insurance, 401k, HSA/FSA, etc) will be, subtracting your standard deduction ($12k single, $24k married), multiplying that by each tax bracket you fall in, and subtracting $2000 times each child you have (as long as your AGI is under $200k single/head-of-household, $400k married) for the child tax credit.

If your situation is less simple, like you own a business (how the new 20% QBI deduction will work is still up in the air), you expect to still itemize despite the higher standard deduction and limitations to itemized deductions, or your income is high enough then you'll need to do more research.

As long as you:
1) Owe less than $1,000
OR
2) Paid at least 90% of you total tax liability
Then you won't owe a penalty

Step 2: Figure out what you have already had withheld

This should be available on your paystub, or from your HR department. If your HR department takes a few pay cycles to implement withholding Form w4 changes then you may want to include those expected amounts in your step 2 amount by adding the amount withheld from your most recent paycheck multiplied by the number of pay cycles you expect it to take before the changes you'll make take effect.

Step 3: Figure out how much you need withheld from the rest of your paychecks this year

Part A: subtract Step 2 from Step 1 to find out the total amount you need to withhold the rest of the year.
Part B: Divide Step 3, Part A by the number of pay periods you have remaining in 2018 to find out the amount you need withheld from each future pay check.

If you expect a change in pay during the year you can still do this, you'll just need to do this process again at that point starting at Step 2.

If you have variable pay you can still do this, but you'll probably want to repeat this process a few times starting at Step 2 and using a guess of average pay in Step 4. The larger your variation, the more often you'll want to repeat to stay on track.

Step 4: Figure out your withholding

You can learn how your payroll department has been instructed to compute your withholding from Publication 1036.

For each allowance you mark on Form w4, you will subtract the following amount from your taxable income (income after deductions like health insurance, 401k, HSA/FSA, etc) depending on how often you're paid.

Payroll PeriodFor Each Withholding Allowance
Weekly79.80
Biweekly159.60
Semimonthly172.90
Monthly345.80
Quarterly1,037.50
Semiannually2,075.00
Annually4,150.00
Daily16.00

Look up the appropriate table in Publication 1036 based on how often you're paid and whether you plan to mark Single or Married on your Form W4.

Part A: Next, take your income after deductions for each pay period (found on your paystub), subtract your number of allowances times the amount for each allowance from the table above, and find the withholding calculation in the appropriate pay period table for this amount.

So, say you selected married and 3 allowances, and you're paid $5000 monthly after deductions. You would then have an income after allowances of $5000 - $345.80 x 3 = $3962.60  You would then look at Table 4 and find that you subtract $2550 from $3962.60, multiply by 12% and add $158.70, so your withholding per paycheck will be ($3962.60 - $2550) x 0.12 + $158.70 = $328.21 per monthly pay check.

Part B: Compare Step 4, Part A to Step 3, Part B.
  • If your calculated withholding is less than your desired withholding, try adding an allowance and start Part B over again
  • If your calculated withholding is more than your desired withholding, try removing an allowance and start Part B over again. If have a very large number of allowances and you're still withholding too much then you'll need to ask your payroll department what the largest number of allowance they'll let you set is, use that, and know you'll probably get a refund.
  • If your calculated withholding is less than your desired withholding and adding one more allowances causes it to be more, congratulations, you're almost done! Enter the number of allowances you used in this calculation on your Form w4

If you're a 2 income household, you may find that you under withhold by a lot even with 0 allowances. In this case try using the single table for your pay period. If this works better then you'll mark "Married, but withhold at higher Single rate" on your Form w4. Or you could just enter a larger amount in Part C.

Part C: Subtract Step 4, Part A from Step 3, Part B. This is the amount you should enter as the additional withholding amount on your Form W4.

Step 5: If your spouse works, include their withholding in these calculations.

The IRS doesn't care which spouse does the withholding, so you can set it up any way you want. For example, if one spouse is higher paid you may want to have them do most of the withholding so the other spouse can afford to max out their retirement accounts. You'll need to include the withholding to date (Step 2) from each spouse, and you'll need to perform Step 4 for each spouse separately, then add them together. It might be easiest to get one spouse pretty close with Step 4, Part B and then only move on to Step 4, Part C with the other spouse such that only one spouse has an additional withholding amount entered.

Step 6: Check back when you get your next paycheck to make sure your employer is withholding the amount you calculated, and as in Step 3, if you get a pay raise during the year or you have variable pay check back in periodically.

And that should do it! No need for an accountant, you won't owe a penalty, you won't owe too much, and you won't give too big an interest free loan.

Remember that if you based your target withholding on last year (Step 1, Option A), you may still owe a lot (but no penalty), so you may want to try out some 2018 tax calculators as they become available and do a test run of your taxes when your preferred tax software releases a draft version in the fall to make sure you aren't surprised. You can always change your withholding at that point.

MDM

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Re: You're probably under withholding for your 2018 taxes
« Reply #1 on: February 26, 2018, 11:40:05 AM »
Nice write-up!

Yes, the case study spreadsheet should do most of that.

It doesn't ask for "amount already withheld" but it's a spreadsheet and using a couple of cells for
- amount already withheld
- fraction of the year that will be affected by a new W-4 (e.g., it may be too late to change March withholding for monthly payrolls, so 9/12 might be appropriate)
one could project total 2018 withholding.

sol

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Re: You're probably under withholding for your 2018 taxes
« Reply #2 on: February 26, 2018, 11:47:35 AM »
My solution to this problem is to withhold at the normal recommended rates, then retire before the tax year ends so that my total income is lower than expected.  I know it's not very scientific. 

We also typically estimate our taxes early enough that we can make late-stage adjustments to our withholdings to soften the blow of any large discrepancies.  Fortunately, this is not a problem you have to get exactly right on your first try.

I'm a red panda

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Re: You're probably under withholding for your 2018 taxes
« Reply #3 on: February 26, 2018, 11:49:05 AM »
So was this the plan for the new tax cuts? Make sure everyone owes a penalty to make up the difference?

sol

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Re: You're probably under withholding for your 2018 taxes
« Reply #4 on: February 26, 2018, 11:54:01 AM »
So was this the plan for the new tax cuts? Make sure everyone owes a penalty to make up the difference?

I doubt it.  This administration has lost or fired a lot of civil service talent, so I think it's more likely their estimated withholding tables were influenced by politics to make the tax cuts look more favorable to workers, without trying to get them correct for end of year totals under the new law.  I chalk this one up to incompetence, not diabolical subterfuge.

terran

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Re: You're probably under withholding for your 2018 taxes
« Reply #5 on: February 26, 2018, 12:15:30 PM »
My solution to this problem is to withhold at the normal recommended rates, then retire before the tax year ends so that my total income is lower than expected.  I know it's not very scientific. 

LOL, that's a great plan, we should all just do that!

We also typically estimate our taxes early enough that we can make late-stage adjustments to our withholdings to soften the blow of any large discrepancies.  Fortunately, this is not a problem you have to get exactly right on your first try.

Exactly, it's not a high stakes thing as long as you check back a few times during the year and adjust as necessary. Instead of doing all the calculations I've even seen people suggest just doing it through trial and error by adjusting your allowances and then seeing what happens in your next paycheck. The underlying withholding calculations really aren't that hard (pretty much the same as figuring your tax based on tax brackets), so it's easy enough to avoid that back and forth though.

So was this the plan for the new tax cuts? Make sure everyone owes a penalty to make up the difference?

Maybe. All those penalties should help with the deficit the bill created, right?

So was this the plan for the new tax cuts? Make sure everyone owes a penalty to make up the difference?

I doubt it.  This administration has lost or fired a lot of civil service talent, so I think it's more likely their estimated withholding tables were influenced by politics to make the tax cuts look more favorable to workers, without trying to get them correct for end of year totals under the new law.  I chalk this one up to incompetence, not diabolical subterfuge.

Could be. The link to the Wealthy Accountant post I linked to in the OP suggests that getting rid of personal exemptions (now rolled into the larger standard deduction for the taxpayer and spouse, and expanded child tax credit for children) makes the allowance system in Form W4 not line up very well with the new tax law.

Basically, they needed to try to get withholding to work out just about right for most people based on the form W4's that were filled out under a very different system.

alanB

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Re: You're probably under withholding for your 2018 taxes
« Reply #6 on: February 26, 2018, 01:23:06 PM »
I have in the past withheld at the lowest possible rate when my income in the previous year was much lower.  I think I hit ~80% of total tax withheld, but no penalty since amount withheld was greater than previous year line 63.  Now I just do 100% since my wife gets mad at me for some strange reason if we owe too much ;)

Any consensus on whether it is unethical to purposefully withhold at 90% of total tax due?  Makes the most financial sense to do that if you can.

MDM

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Re: You're probably under withholding for your 2018 taxes
« Reply #7 on: February 26, 2018, 01:36:34 PM »
Any consensus on whether it is unethical to purposefully withhold at 90% of total tax due?  Makes the most financial sense to do that if you can.
From Legal Quote of the Week - Learned Hand on Taxes | businesslawbasics.com:
"Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one's taxes.
Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any
public duty to pay more than the law demands."

terran

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Re: You're probably under withholding for your 2018 taxes
« Reply #8 on: February 26, 2018, 02:05:02 PM »
Any consensus on whether it is unethical to purposefully withhold at 90% of total tax due?  Makes the most financial sense to do that if you can.

I don't know if there's a consensus, but I certainly wouldn't have a problem with it.

I tend to just aim for 100% of the previous years taxes. For us that's usually less than the current years taxes (2018 might be an exception depending on how things shake out -- Mostly the QBI deduction --  but probably not much different). We also don't have a huge tax liability so optimizing that last little bit by targeting 90% of the current year taxes wouldn't make that much difference for us.

katsiki

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Re: You're probably under withholding for your 2018 taxes
« Reply #9 on: February 28, 2018, 12:34:04 PM »
Any consensus on whether it is unethical to purposefully withhold at 90% of total tax due?  Makes the most financial sense to do that if you can.

I don't know if there's a consensus, but I certainly wouldn't have a problem with it.

I tend to just aim for 100% of the previous years taxes. For us that's usually less than the current years taxes (2018 might be an exception depending on how things shake out -- Mostly the QBI deduction --  but probably not much different). We also don't have a huge tax liability so optimizing that last little bit by targeting 90% of the current year taxes wouldn't make that much difference for us.

This seems like an interesting approach for anyone who funded a DAF last year.  It could be a decent amount to float.

sol

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Re: You're probably under withholding for your 2018 taxes
« Reply #10 on: February 28, 2018, 01:41:29 PM »
This seems like an interesting approach for anyone who funded a DAF last year.  It could be a decent amount to float.

Please help me understand this idea.  You're suggesting that a person who funded a DAF last year (like I did), and thus had an artificially low tax rate in 2017, could structure their 2018 withholding to be 90% of that low number and still avoid am underpayment penalty?  This would likely result in a large tax bill owed in April of 2019, right?  I see the advantage in that, because you get to keep that money for an extra year in which you would presumably invest it for a positive return before turning it over to Uncle Sam.

terran

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Re: You're probably under withholding for your 2018 taxes
« Reply #11 on: February 28, 2018, 01:47:25 PM »
This seems like an interesting approach for anyone who funded a DAF last year.  It could be a decent amount to float.

Please help me understand this idea.  You're suggesting that a person who funded a DAF last year (like I did), and thus had an artificially low tax rate in 2017, could structure their 2018 withholding to be 90% of that low number and still avoid am underpayment penalty?  This would likely result in a large tax bill owed in April of 2019, right?  I see the advantage in that, because you get to keep that money for an extra year in which you would presumably invest it for a positive return before turning it over to Uncle Sam.

No, you'd shoot for 100% of the 2017 tax liability (110% if you have AGI over $150k) as that's the safe harbor based on the previous  years taxes. The 90% safe harbor is based on paying at least 90% of the current years tax liability (2018 in this case). And yes, if your 2018 tax liability was a lot higher than your 2017 tax liability then you would owe a lot in April 2019 for your 2018 taxes (but no penalty).

katsiki

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Re: You're probably under withholding for your 2018 taxes
« Reply #12 on: February 28, 2018, 02:40:11 PM »
This seems like an interesting approach for anyone who funded a DAF last year.  It could be a decent amount to float.

Please help me understand this idea.  You're suggesting that a person who funded a DAF last year (like I did), and thus had an artificially low tax rate in 2017, could structure their 2018 withholding to be 90% of that low number and still avoid am underpayment penalty?  This would likely result in a large tax bill owed in April of 2019, right?  I see the advantage in that, because you get to keep that money for an extra year in which you would presumably invest it for a positive return before turning it over to Uncle Sam.

No, you'd shoot for 100% of the 2017 tax liability (110% if you have AGI over $150k) as that's the safe harbor based on the previous  years taxes. The 90% safe harbor is based on paying at least 90% of the current years tax liability (2018 in this case). And yes, if your 2018 tax liability was a lot higher than your 2017 tax liability then you would owe a lot in April 2019 for your 2018 taxes (but no penalty).

@sol, @terran nailed what I was referring to.  He seems to have a better handle on taxes so I am glad he chimed in as well.  One of the reasons that I love this forum.

hadabeardonce

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Re: You're probably under withholding for your 2018 taxes
« Reply #13 on: February 28, 2018, 03:32:10 PM »
In 2017 we itemized for $14,904, which is over the standard deduction of $12,700, and got like $2,838 back. In 2018 the standard deduction is going to $24,000, so I think we'll be ok. I even reduced my withholding to try and get closer to $0.

2017
Code: [Select]
M /mo. /yr.
0 $405 $4860
1 $344 $4128
2 $305 $3660
3 $243 $2916
4 $203 $2436
5 $153 $1836
6 $119 $1428

2018
Code: [Select]
0 $329 $3948
1 $288 $3456
2 $246 $2952
3 $205 $2460
4 $163 $1956
5 $128 $1536
6 $ 93 $1116

I looked up our MFJ tax bracket on the IRS site. Going from M-0(2017) to M-4(2018).  Difference of $2,904/yr.

sol

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Re: You're probably under withholding for your 2018 taxes
« Reply #14 on: February 28, 2018, 03:38:58 PM »
No, you'd shoot for 100% of the 2017 tax liability (110% if you have AGI over $150k) as that's the safe harbor based on the previous  years taxes. The 90% safe harbor is based on paying at least 90% of the current years tax liability (2018 in this case). And yes, if your 2018 tax liability was a lot higher than your 2017 tax liability then you would owe a lot in April 2019 for your 2018 taxes (but no penalty).

Okay, thanks for the clarification.

So in my case, if my 2017 federal income tax due was only $10k because of a big DAF deduction, then I can avoid a 2018 penalty by withholding at least $10k from my paycheck, even if I know my 2018 federal tax due will be $18k?  That still puts me in the position of owing the extra $8k in April of 2019, but I would get to keep it between now and then. 

In practice this is probably not so helpful to me, because I'm not planning to work a full year anyway and so my 2018 taxes due will probably end up being pretty similar to my artificially low 2017 taxes due after the DAF deduction.  But it's a good thing to keep in mind.

MDM

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Re: You're probably under withholding for your 2018 taxes
« Reply #15 on: February 28, 2018, 03:58:38 PM »
In 2017 we itemized for $14,904, which is over the standard deduction of $12,700, and got like $2,838 back. In 2018 the standard deduction is going to $24,000, so I think we'll be ok. I even reduced my withholding to try and get closer to $0.
...
I looked up our MFJ tax bracket on the IRS site. Going from M-0(2017) to M-4(2018).  Difference of $2,904/yr.
Difference between AGI and taxable income
2017: $14,904 + $4,050 + $4,050 = $23,004
2018: $24,000

If your gross income for 2018 is identical to 2017, your taxable income will be ~$1000 less (assuming MFJ w/ no kids).

With less taxable income and lower tax rates, your 2018 tax is likely to be lower than for 2017.  How much lower, and how does that compare to your 2018 withholding - those are for you to answer.  Appears you have a good handle on it!

hadabeardonce

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Re: You're probably under withholding for your 2018 taxes
« Reply #16 on: February 28, 2018, 05:47:58 PM »
In 2017 we itemized for $14,904, which is over the standard deduction of $12,700, and got like $2,838 back. In 2018 the standard deduction is going to $24,000, so I think we'll be ok. I even reduced my withholding to try and get closer to $0.
...
I looked up our MFJ tax bracket on the IRS site. Going from M-0(2017) to M-4(2018).  Difference of $2,904/yr.
Difference between AGI and taxable income
2017: $14,904 + $4,050 + $4,050 = $23,004
2018: $24,000

If your gross income for 2018 is identical to 2017, your taxable income will be ~$1000 less (assuming MFJ w/ no kids).

With less taxable income and lower tax rates, your 2018 tax is likely to be lower than for 2017.  How much lower, and how does that compare to your 2018 withholding - those are for you to answer.  Appears you have a good handle on it!
I hadn't read up on the $4,050 personal exemption being eliminated. My 2018 taxes really are going to look a lot like 2017... what a lackluster tax bill.

...and yeah, MFJ w/o kids - #DINKs4Life

terran

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Re: You're probably under withholding for your 2018 taxes
« Reply #17 on: February 28, 2018, 09:06:41 PM »
No, you'd shoot for 100% of the 2017 tax liability (110% if you have AGI over $150k) as that's the safe harbor based on the previous  years taxes. The 90% safe harbor is based on paying at least 90% of the current years tax liability (2018 in this case). And yes, if your 2018 tax liability was a lot higher than your 2017 tax liability then you would owe a lot in April 2019 for your 2018 taxes (but no penalty).

Okay, thanks for the clarification.

So in my case, if my 2017 federal income tax due was only $10k because of a big DAF deduction, then I can avoid a 2018 penalty by withholding at least $10k from my paycheck, even if I know my 2018 federal tax due will be $18k?  That still puts me in the position of owing the extra $8k in April of 2019, but I would get to keep it between now and then. 

In practice this is probably not so helpful to me, because I'm not planning to work a full year anyway and so my 2018 taxes due will probably end up being pretty similar to my artificially low 2017 taxes due after the DAF deduction.  But it's a good thing to keep in mind.

Yes, as long as by tax due you mean the total amount of your tax liability (1040 line 63), and not the amount due after withholding and estimated taxes and some other ways of paying (1040 line 78), then it sounds like you've got it!

terran

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Re: You're probably under withholding for your 2018 taxes
« Reply #18 on: February 28, 2018, 11:48:24 PM »
This whole thing is overly complicated.

Everyone should know that essentially there is no tax underpayment 'penalty'.  It's basically just interest.  For example, I had a payment due of $11k this year and paid a 'penalty' of $77.  That amounts to about 0.7%.  Considering that is interest for a 7+ month loan (averaging), the interest rate is well under 2%.  So both the rate and the amount of the penalty relative to the overall tax owed is small.

I should probably increase my withholding again, but I have variable income that makes this situation happen regularly.  With the penalty so reasonable, I just don't worry about it much.

It seems taking the same approach with 2018 and the new tax law makes sense.  See how it works out, maybe pay some minuscule interest, and adjust withholdings in 2019 if you fell like it. 

I may be a little lazy!

That's another option. :)

I only took a quick look at the instructions for calculating the underpayment penalty, but if I'm reading it right it's 4% annually. Whether or not paying that interest is worth it to you to avoid having to figure out your withholding is up to you. At least at current rates you could make the argument that you should be able to beat the rate on average by investing it, but certainly not for a risk free return (unless you have other higher interest debt).

According to Taxact, the penalty rate "is generally the federal short-term rate plus 3 percentage points." This page also seems to indicate there may be an additional 0.5%/month penalty in addition to the interest. I'm not seeing that in the forms, but I could be missing it.

EricEng

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Re: You're probably under withholding for your 2018 taxes
« Reply #19 on: March 01, 2018, 06:32:09 AM »
No, you'd shoot for 100% of the 2017 tax liability
This is my plan for 2018.  With DAF and other deductions I reduced my fed to $0 for 2017.  So for 2018 it doesn't matter how little I withhold, just have to pay up in 2019.

terran

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Re: You're probably under withholding for your 2018 taxes
« Reply #20 on: March 01, 2018, 08:22:49 AM »
4% is certainly something to fret about, but I've never paid anywhere near that amount.  I looked at the form you linked to and it seems to show 2.66%, but then it's discounted for paying before 4/15.  My pay date was about 2/15, so accustom the form the payment should be 2%.  My actual payment calculated by TT was only 0.7%.  I don't even see form 2210 in my return from TT though.  Strange. 

Anyone else pay a penalty and what % of the amount owed was it?

Where are you getting 2.66% from?

I'm looking at the "Worksheet for Form 2210, Part IV, Section B—Figure the Penalty (penalty worksheet)" in the Form 2210 instructions. It has you count the number of days you missed the deadline by, divide by 365 and multiply by 0.04. So it's not 4% straight because it's adjusting for how late you were, but rather a daily rate equivalent to a 4% annual rate. So it's unlikely you'd ever pay 4% of your underpayment (maybe if you owed it all from first quarter income?), but making a comparison to an annualized rate is still the right thing to do because the number of days late the payment is is still the number of days you wouldn't have had it invested if you had paid on time.

The IRS says the 4% underpayment interest rate remains in effect for the first quarter of 2018.

Of course if you're viewing it as a fee for avoiding hassle and not a return optimization strategy, you shouldn't actually care about the annualized rate, you should only care about the absolute dollar amount and whether that's worth it to you to avoid the hassle. Personally I find targeting last year's tax liability to be pretty easy, so I just do that. If you underpaid by $11k last year you're probably over $150k AGI so you'd have to pay 110% of last year.


Heroes821

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Re: You're probably under withholding for your 2018 taxes
« Reply #21 on: March 01, 2018, 08:57:55 AM »
I only have my personal anecdote here, but MFJ 3 kids single income. Maxing 401k, HSA, and two tIRAs the MDM spreadsheet as well as a CPA friend's companies' software and the turbotax withholding calculator for 2018 both had me at like 6,000+ in overwithholdings.  Due to the 6000 in CREDIT on fed from my kids it seems like I've already withheld in 4 paychecks my entire years worth of federal tax liability.

NathanP

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Re: You're probably under withholding for your 2018 taxes
« Reply #22 on: March 01, 2018, 09:57:10 AM »
Many people up-thread mention that they are targeting 2017s tax number to avoid an underpayment penalty. While this works, it may mean that you are greatly overpaying since your taxes may have dropped quite a bit due to tax changes.

Thanks to the newly increased standard deduction many (most?) of us won't be itemizing in 2018. Also, now that the income limits for the child tax credit were increased, most of us won't be limited there either.

These two changes greatly reduced the complexity of figuring out ones tax liability for next year. I took my latest pay statement ( and spouse ) and projected our taxable income for the year (pay periods * taxable income), subtracted $24k and then computed the taxes owed. I then did the same math with the federal withholding on our latest pay statements and computed the tax paid for the year. After subtracting $2k per child for the tax credit, I found that we would be safely within the $1k limit to avoid a paying a penalty while withholding less than in 2017.

For 2017 this math was much more complex as our income fell within the child tax credit phaseout range, and we would itemize.

Penn42

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Re: You're probably under withholding for your 2018 taxes
« Reply #23 on: March 03, 2018, 08:44:09 AM »
Thanks for the big write up.  Most of it went way over my head on the first read, but I'll wade through it a little more to help my understanding of the issue. 

For now, I've used the IRS calculator released the other day and because my taxes are currently very simple and I'm able to put in good approximations I think the results are pretty trustworthy.  Last year I claimed single and 0 and had a huge refund.  The calculator recommends I claim single and 5 else my refund will be even huger.  I'll have a much smaller AGI this year because I'll be maxing out my 401k!.  Yay for paying off student loans!


sirdoug007

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Re: You're probably under withholding for your 2018 taxes
« Reply #24 on: March 05, 2018, 11:02:45 AM »
I just looked into this myself, and yup, massive underpayment.  I just changed jobs this year and took a big paycut to become a financial planner so I can't use last years tax bill.

It looks like my wife and I were on track to owe $5500 (plus penalty interest)!  Thanks for bring this up!

Aggie1999

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Re: You're probably under withholding for your 2018 taxes
« Reply #25 on: March 05, 2018, 02:51:24 PM »
Question: When comparing your total withholdings for the current year with your previous year tax liability do you subtract non-refundable credits, like the foreign tax credit, from your current year withholdings before doing the compare?

The "refundable" credits part of this line from the 1040-ES form has be confused:

Quote
2. You expect your withholding and refundable credits to be less than the smaller of...

MDM

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Re: You're probably under withholding for your 2018 taxes
« Reply #26 on: March 05, 2018, 03:35:20 PM »
The "refundable" credits part of this line from the 1040-ES form has be confused:

Quote
2. You expect your withholding and refundable credits to be less than the smaller of...
Add withholding plus refundable credits.  No negative signs or subtractions involved.