How to Not Owe Buckets of Money at Tax Time

Basically ever since I had my first job scooping ice cream, tax time has been kind of weird for me.  Some people get moderately excited about the thought of a refund, but then forget about it five minutes later.  Even more people put off doing their taxes until the last possible day, causing traffic jams at post offices all over the place on April 13.  I, on the other hand, am what’s known as a “weirdo” when it comes to taxes.  I can’t tell you how many years I haven’t even waited until I have all my documents before I loaded up TurboTax.  While the rest of America binges on wings and beer for the Super Bowl, I’m checking out deductions, trying to find obscure tax write-offs, and generally just nerding out to an insane degree.

Most years, that’s been fine, because I’ve gotten a little bit of a refund, and it’s gone to savings, debt, or some stupid purchase that I’ve completely forgotten about.  The past two years, however, have resulted in some nastygrams from the IRS.  This year especially was a doozy.  Once I had put in the final W-2 and watched the refund number turn into a rather large “Amount You Owe,” tax time quit being fun.  Somehow, we’re now on the hook for an entire two paychecks’ worth of missed taxes.  How did we get it so wrong?  And how can we change it for next year?  If you’re like us and worked a bunch of jobs last year, listen up.

What’s This Withholding Business?

You all know that Uncle Sam wants his cut of your paycheck, right?  And politics aside, the concept of taxes is a logical one; it pays for stuff that we all use and provides an income for the government we have to operate from.  You start the withholding process any time you start a new job through the W4 form, which is essentially an agreement between you and your company that they will take out part of your income and pay the government from every check rather than having to pay it all at once.  Sure, you could probably claim exemption, but the IRS might disagree with you a little, so it’s best to be honest.

As long as the amount you agree on comes out to 90% or more of the taxes you actually owe at the end of the year (we’ll get to that), you’re golden.  Any less than 90% and you get to pay penalties on top of whatever amount you’re short.  This is where the tricky part comes in, especially in a gig economy and an age where people work 2 or 3 jobs.  Most of the time, W4 forms only take into consideration what you make at that job when they figure the withholding rate.  For example, the part-time job I held two years ago was taking out $2 every paycheck.  I got paid weekly, so at the end of the year, had I not caught it several months in to my employment there, they would have taken out $100.  Which would have been great if that were my only job, since I wouldn’t really have owed any taxes, but since I did have another income, it put us way under the mark for our 2016 return.

How Do I Know What I’ll Owe?

This is where your eyes might glaze over, but stick with me, it’s important!  To accurately fill out your form W4, you need to know how much you expect to make, and therefore how much you can expect to owe.  Now, it’s too late for 2017, but let’s look ahead to 2018, especially now that we have a shiny new tax structure in place.  You can look at all the brackets, or marginal tax rates, at this Motley Fool article, but I’ll use Rachel and myself as an example.

Let’s say we’ll make $50,000 in 2018 as a married couple filing jointly.  We don’t itemize our deductions (even though I look at them for fun), so we’ll take the standard deduction of $24,000, making our taxable income $26,000.  According to the IRS, that puts us in the second tax bracket, which covers incomes ranging from $19,050-$77,400.  That means we owe $1,905 plus 12% of the amount over $19,050.  A little math means that 12% part equals $594, for a grand total of $2,499 that we can expect to owe in 2018.

For the sake of argument, let’s call that an even $2,500.  To figure out how much we need to withhold from every paycheck, we get to do more math, this time figuring out how many paychecks we have.  If we’re starting from January 1st, $48.07 needs to be taken out of each of our biweekly paychecks (since there are two of us) to make sure we cover the tax obligation completely.  You can do the math from there, but in our situation, as long as we have at least $208 coming out across all our jobs every month, we can avoid another repeat of our 2016 and 2017 tax returns.

I would suggest doing the most adjustment at your “main” job, or wherever you make the most money.  If I had tried withholding the entire amount we owed from my part-time job, I would have basically been paying them to work there.  But whatever you do, please don’t neglect that portion of your check if you’re working multiple jobs.

What If I Already Owe Buckets of Money, but I’m All Out of Buckets?

Yep, us too.  You’ve got a few options if you’re on the hook this year.

Wait to File

You still have time to save up some cash, so if you do owe, you can hold off until April 17th this year.  Just don’t forget to file by that date, even if you can’t pay all that you owe by then.

Request a Payment Plan

If you’re really in deep water, you can request a payment plan through the IRS.  The eligibility requirements vary by situation, but generally, as long as you haven’t requested a payment plan in the last five years, you’re current on all prior years filing-wise, and you owe $50,000 or less, you can apply.  The rest of the plans and terms can be found on the IRS’ website.  Keep in mind, they do charge a little bit of interest and possibly a setup fee for this option.

Move to Tibet

This is a great option for 

Editor’s note: No, this is not a good option.  Pay what you owe, people, even if it makes things interesting.

Hopefully, you won’t follow our example and work a bunch of jobs and just expect things to work out in the end when it comes to taxes.  Taking charge of your money means a lot of different things, and one of those things is managing your taxes.  Side note, I’m not a tax professional, individual situations vary, and information in this post is meant to be generally informative, not taken as legal or financial advice.  You’ll need to have those conversations with a licensed tax pro, your HR department, or both.

 

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