Tax planning case study

[Travis]

I've been running my numbers trying to see if I need to change my withholding and see if I can predict 2015 taxes and I'm running into a couple snags.  I have no idea how my investments will affect my taxes this year since this is my first full year with my new TSP and Vanguard portfolio so I left them out of the equation (I'll add them back if there's a way to predict it).  I wanted to get your take on this to see if I'm doing this right.

2015 gross taxable income married filing jointly: mine $81,000  hers $3300
W4 allowances:                                                    me: 3                her: 0
TSP/401k contribution:                                                   me: $18,000     her: 0
Federal tax withheld by 31 Dec:                          me: $5900 $537/month       her: $180 $60 a month and her temp job will end in Nov
Medicare:                                                                       me: $106.63/month   her: don't know yet, have seen a full month report yet
SS:                                                                                   me: $455.92/month      her: don't know yet

My ROTH IRA: $58k VSTAX Her ROTH IRA: $15k VSTAX
Taxable:            $144k VSTAX, $86k VTIAX



Dependents: 1 (age 5) we claim the child credit, but not the childcare credit

Last year I had only 1 month of taxable income due to my deployment, and this year I had 11 months

The IRS says my anticipated income tax is $5336 and based on my current withholding I'll have $7200 withheld resulting in $1800 overpayment.  This doesn't make sense since our withholding this year should come out to about $6150 in federal taxes.  Turbotax says I'll have a $700 overpayment.

The IRS site thinks I'll break even this year if I increase exemptions to 4, though none of this includes any dividends or capital gains.  I'm not sure how much help last year's return will be since I was deployed to a combat zone for most of it and my portfolio was all over the place for part of the year.  If my wife continues to work our combined income will go up about $10k next year so that's also a factor in whether or not to mess with withholding.  Am I better off just sitting on this to see how it will play out or is it worth my time to make any changes? 

updates in bold

[johnny847]

You claim allowances on a W-4, not exemptions. You can claim to be exempt from tax withholding, but that's not exemptions (plural).

I bring this up because it can be confusing when talking about how many exemptions you can claim on your tax return (three - one for you, your wife, and your kid - I'm assuming you guys are MFJ).

Post your current taxable investments and we can help you with the expected tax bill on that. Your TSP returns are irrelevant to taxes but your contributions are (glad to see you listed those).

Are you guys contributing to an IRA?

Mental note for myself so I don't forget later: you guys should probably qualify for the child tax credit - I need to read up on this.

[MDM]

Is $4,332 close to what the IRS and TurboTax calculate for your 2015 federal income tax bill?  See tables below based on numbers in the OP.  As johnny847 notes, other things (e.g., IRAs, itemized deductions, student loan interest, other income, etc.) can affect this number.  And as stated, your TSP gains or losses are irrelevant.

Category	Monthly	Comments	Annual
Salary/Wages for person #1	$6,750		$81,000
Salary/Wages for person #2	$275		$3,300
401(k) / 403(b) / TSP / etc.	$1,500	Room to increase?	$18,000
Income subject to IRS tax	$5,525		$66,300
Federal Total Income	$5,525		$66,300
Federal tax	$361	2015 rates, MFJ, stand. ded., 3 exempt.	$4,332
State/City tax	$161	Guess, using 4.63% * Fed. Taxable	$1,931
Soc. Sec.	$436	Assumes 2 earners paying	$5,227
Medicare	$102		$1,222
Total income taxes	$1,059		$12,712
Income before other expenses	$4,466		$53,588

Filing Status	2	1=S, 2=MFJ
# Exempt.	2
# Children <17	3
# of earners	2
Total Income	$66,300
Std. Deduct.	$12,600
Act. Deduct.	$12,600
Exemption	$12,000
AGI	$66,300
MAGI	$66,300
Taxable	$41,700
Tax	$5,333
Savers' credit	$0
Tax after n-r credit	$5,333
Child Tax Cred.	$1,000
EIC	$0
Net Tax	$4,333
Monthly	$361
State tax	$1,931	4.63%

[seattlecyclone]

Remember that long-term gains and qualified dividends have a 0% tax rate up to the top of the 15% bracket. Given your salary, if you max out your traditional TSP you could probably have $30k of capital gains/dividend income (give or take) before you would pay any tax on it. If you expect to be well below this level, don't even worry about that.

Also it's good to be aware of the "safe harbor" rules around estimated tax penalties for years when your income goes up significantly. Whatever your total federal tax liability was in 2014, if you have at least that much withheld this year you won't owe any underpayment penalties on your 2015 taxes. Same for next year: whatever your total tax is this year, you won't owe any penalties on next year's taxes as long as you have at least 100% of your 2015 tax withheld in 2016 (this number goes up to 110% if your income is over $150k).

[Travis]

MDM, I made some updates to my original post.  My TSP contributions amount to $1544 a month (21%) and I don't pay state income tax (I'm a Texas resident).

[MDM]

MDM, I made some updates to my original post.  My TSP contributions amount to $1544 a month (21%) and I don't pay state income tax (I'm a Texas resident).

Ok, we can ignore the state tax then - it doesn't affect the federal anyway, because you aren't itemizing deductions.

If "The IRS says my anticipated income tax is $5336" doesn't account for the child tax credit, then that's essentially the same number as the $4332 calculated by the MMM case study spreadsheet (the $4 difference could be due to the IRS use of $50 increments in the tax tables).  Turbotax seems to be an outlier - can you tell why?

Anyway, if you are comfortable that you are getting the child credit (and you have included all taxable income) you have two sources for believing that your income tax for 2015 will be ~$4335, and can adjust your withholding to aim for that.

[Travis]

As far as I can tell I fed the IRS and TurboTax the same information.  Here are the summaries:

Turbotax:


    Total Income $73,300
    Total Deductions $12,600
    Total Exemptions $12,000
     
    Taxable Income $48,700
     

    Regular Taxes $6,386
    Alt. Minimum Tax $0
    Additional Taxes $0
    Tax Credits $1,000
    Tax Payments $6,087
     
    Your Refund $701
     
    Marginal Tax Rate 15%

IRS:

Based on the information you previously entered, your anticipated income tax for 2015 is $5,336. If you do not change your current withholding arrangement, you will have $7,197 withheld for 2015 resulting in an overpayment of $1,861 when you file your return. If you want your withholding to more closely match your anticipated tax, adjust your withholding on new Forms W-4 as follows:

    Job 1 (which has a projected salary of $88,000): 4 allowances.
    Job 2 (which has a projected salary of $3,300): 0 allowances.
    Check the “Married” box on your Forms W-4

Assuming this recommendation is in effect for the rest of 2015 your withholding will approximately equal your anticipated tax, and any refund or balance due should be less than $25.

Caution! The above recommendation may result in insufficient withholding next year (because it was computed for a job that did not span the entire year). Be sure to check your withholding at the beginning of next year to ensure that you are not underwithheld for 2016.

Following is a recap of information entered on the preceding pages on which the above advice is based.
Prepared: September 16, 2015
Filing Status: joint   
Number of jobs: 2   Number of dependents: 1

Child & dependent care credit qualifying persons: 0    Child & dependent care credit expenses: $0
Eligible children for child tax credit: 1    Other credits: $0

Total salary: $91,300    Total plans and cafeteria: $18,000
Total tax withheld to date: $3,795    Total tax withheld from last check: $597

Total earned income other than salary: $0    Nonwage income: $0
Adjustments to income: $0    Total itemized deductions: $0

Projected additional withholding if you do nothing: $3,402    

These numbers from the IRS seem way off.  I'll have a little over $2200 more withheld to close out the year, not $3400.  Maybe the IRS website doesn't know what month we're in?

[Travis]

A couple common things missing from your analysis are mortgage interest, dividend income, and interest income so you may want to include that unless they are close to nothing.

I'm a renter so no interest there, and what I'll have in dividend and interest income is one of my big question marks for this year since this is a fairly recent development for me.

[MDM]

you don't ever want to owe more than $1000 as there are steep penalties and interest.

That's not necessarily true.  See http://www.irs.gov/publications/p17/ch04.html#en_US_2014_publink100032429 for the "Generally, you will not have to pay a penalty for 2014 if..." language.

[seattlecyclone]

Yes. If you owe more than $1,000 and owe more than 10% of this year's total tax and failed to have at least 100% of last year's taxes withheld (110% if your income was over $150k), you'll probably owe a penalty.

[MDM]

As far as I can tell I fed the IRS and TurboTax the same information.  Here are the summaries:

Turbotax:
    Total Income $73,300
    Regular Taxes $6,386
    Tax Credits $1,000

IRS:
Based on the information you previously entered, your anticipated income tax for 2015 is $5,336.
    Job 1 (which has a projected salary of $88,000): 4 allowances.
    Job 2 (which has a projected salary of $3,300): 0 allowances.

Note that there is a $7K difference between both of these and the OP.  Adding that, one gets the numbers below, close enough to the TurboTax result:

Category	Monthly	Comments	Annual
Salary/Wages for person #1	$6,750		$81,000
Salary/Wages for person #2	$275		$3,300
401(k) / 403(b) / TSP / etc.	$1,500	Room to increase?	$18,000
Income subject to IRS tax	$5,525		$66,300
Other ordinary income	$583		$7,000
Federal Total Income	$6,108		$73,300
Federal tax	$449	2015 rates, MFJ, stand. ded., 3 exempt.	$5,382
State/City tax	$0		$0
Soc. Sec.	$436	Assumes 2 earners paying	$5,227
Medicare	$102		$1,222

Filing Status	2	1=S, 2=MFJ
# Exempt.	2
# Children <17	3
# of earners	2
Total Income	$73,300
Std. Deduct.	$12,600
Act. Deduct.	$12,600
Exemption	$12,000
AGI	$73,300
MAGI	$73,300
Taxable	$48,700
Tax	$6,383
Savers' credit	$0
Tax after n-r credit	$6,383
Child Tax Cred.	$1,000
EIC	$0
Net Tax	$5,383