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Tax: dependants, bonus

Tax: dependants, bonus

Old Aug 22nd 2014, 6:37 pm
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Default Tax: dependants, bonus

Me: self employed, LLC, pass through taxes.
Wife: employed, W2 etc
Married filing jointly

She is taxed as if no dependants and her most recent paycheck, where she got a $3k bonus, has been taxed at 45% . Her payroll department said it was because I claim the 2 kids, not her, so she's taxed at the highest rate.

Is this right? Will we end up taxed correctly by the end of the year (I pay quarterly estimated taxes)? Last couple of years we used an accountant; this year I plan to use Turbotax as using the latter alongside the accountant resulted in figures that were close enough to make it more cost effective to go it alone.

Sorry if that's rather vague - still trying to learn the lingo etc.
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Old Aug 22nd 2014, 6:54 pm
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Default Re: Tax: dependants, bonus

Originally Posted by GeoffM View Post
Me: self employed, LLC, pass through taxes.
Wife: employed, W2 etc
Married filing jointly

She is taxed as if no dependants and her most recent paycheck, where she got a $3k bonus, has been taxed at 45% . Her payroll department said it was because I claim the 2 kids, not her, so she's taxed at the highest rate.

Is this right? Will we end up taxed correctly by the end of the year (I pay quarterly estimated taxes)? Last couple of years we used an accountant; this year I plan to use Turbotax as using the latter alongside the accountant resulted in figures that were close enough to make it more cost effective to go it alone.

Sorry if that's rather vague - still trying to learn the lingo etc.
That is not common since most companies withhold taxes on bonuses at a flat 25% federal but often that is less than the taxes owed since it is on top of other withholdings and will be taxed at the highest marginal tax bracket for that income. However when you file your tax return, everything gets straightened out.

However at 45%, that is probably not out of the ballpark since if your highest marginal tax bracket is 28% + 7.65% FICA + highest marginal state income tax, that may only be a few percent lower. Since normal paychecks already include all the deductions and exemption to calculate withholding, that is why bonuses are taxed at the highest marginal tax bracket without consideration for deductions and exemptions.

Last edited by Michael; Aug 22nd 2014 at 7:03 pm.
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Old Aug 22nd 2014, 6:54 pm
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Default Re: Tax: dependants, bonus

A long long long time ago, I was advised that no penalties will attach for underpayment or underwithholding if the amount withheld/paid equals or exceeds the prior years taxes.

We've been with the same CPA for 25 years and we give her a call when we have questions like this.
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Old Aug 22nd 2014, 7:15 pm
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Default Re: Tax: dependants, bonus

Originally Posted by Michael View Post
However when you file your tax return, everything gets straightened out.
Thanks - those were the magic words

Originally Posted by S Folinsky View Post
A long long long time ago, I was advised that no penalties will attach for underpayment or underwithholding if the amount withheld/paid equals or exceeds the prior years taxes.

We've been with the same CPA for 25 years and we give her a call when we have questions like this.
Our previous accountant was dual UK/US so might have been more expensive than a US-only CPA. Maybe I ought to look around, as our UK stuff is not relevant any more.
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Old Aug 22nd 2014, 9:29 pm
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Default Re: Tax: dependants, bonus

Originally Posted by S Folinsky View Post
A long long long time ago, I was advised that no penalties will attach for underpayment or underwithholding if the amount withheld/paid equals or exceeds the prior years taxes.
Almost.

Penalties don't apply if either:
- You were subject to tax for all of the previous year but had no taxes to pay
or
- the underpayment is less than $1000
or
- you paid at least 90% of the taxes owed
or
- you paid 100% of the taxes you paid last year (110% if adjusted gross income above $150k / $75k if married filing separate).

You can be liable for penalties for not paying the right amounts of estimated tax at the right time too, though.
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Old Aug 22nd 2014, 10:24 pm
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Default Re: Tax: dependants, bonus

Are you sure its 45%, or is it approximately 45%? ..... Any bonuses that Mrs P and I have been paid in the US have always been taxed at 42%, which seems very high, but like Michael said, it all comes out in the wash at the year end. If it is a true 45%, perhaps the difference is state income tax?

Despite any bonuses we get being taxed at a high rate, our taxes usually come out at close to break even on our tax returns. We receive a state refund of $400-$700 and owe the Federal government around $800-$1,200.

Last edited by Pulaski; Aug 23rd 2014 at 12:10 am.
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Old Aug 22nd 2014, 10:40 pm
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Default Re: Tax: dependants, bonus

Originally Posted by Pulaski View Post
Are you sure its 45%, or is it approximately 45%? ..... Any bonuses that Mrs P and I have been paid in the US have always been taxed at 42%, which seems very high, but like Michael said, it all comes out in the wash at the year end. If it is a true 45%, perhaps the difference is state income tax?

Despite any bonuses we get being taxed at a high rate, our taxes usually come out at close to break even on our tax returns. We receive a state refund of $400+$700 and owe the Federal government around $800-$1,200.
Wifey said 45 and she's asleep at the moment - I suspect it was more "about" rather than "exactly"
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Old Aug 22nd 2014, 10:51 pm
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Default Re: Tax: dependants, bonus

Originally Posted by Owen778 View Post
You can be liable for penalties for not paying the right amounts of estimated tax at the right time too, though.
A long time ago I received advice that wage withholding will be credited to the entire year -- we had ALL of December's paycheck of OH to make up for the shortfall in the estimated payment.
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Old Aug 23rd 2014, 2:43 am
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Default Re: Tax: dependants, bonus

Originally Posted by S Folinsky View Post
A long time ago I received advice that wage withholding will be credited to the entire year -- we had ALL of December's paycheck of OH to make up for the shortfall in the estimated payment.
That is very sensible.
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Old Aug 23rd 2014, 3:55 am
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Default Re: Tax: dependants, bonus

I was going to pay additional estimated tax in September - and still will - but think I'll do a little less than originally planned.
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Old Aug 23rd 2014, 5:28 am
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Default Re: Tax: dependants, bonus

Originally Posted by Owen778 View Post
You can be liable for penalties for not paying the right amounts of estimated tax at the right time too, though.
So true. Last year we made estimated payments on rental and property sales, and I got the calcs wrong. We ended up getting a 5 figure refund, but still got stuck with a $30 or 40 penalty for paying our estimated payments in the wrong quarters. Ok, not the end of the world, but I was spitting teeth at the lunacy of having a penalty deducted from my refund. My CPA bought me a steak lunch to put it in perspective....
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Old Aug 24th 2014, 1:00 pm
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Default Re: Tax: dependants, bonus

Originally Posted by Yorkieabroad View Post
So true. Last year we made estimated payments on rental and property sales, and I got the calcs wrong. We ended up getting a 5 figure refund, but still got stuck with a $30 or 40 penalty for paying our estimated payments in the wrong quarters. Ok, not the end of the world, but I was spitting teeth at the lunacy of having a penalty deducted from my refund. My CPA bought me a steak lunch to put it in perspective....
Could I get details of your CPA? I don't have the inclination to sort mine out next year. It worked well enough getting a realtor recommendation from you!
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