W-4 choices determine refunds or payments
February 28, 2013
"I had taxes withheld from my paychecks last year. So why do I still owe the IRS?"
This is a question we frequently get asked at the Tax Center when a client comes in expecting to see some money returned to them, but then they end up owing the IRS money instead.
There can be multiple reasons for this, and each tax return is a little bit different, but the most common reason for this has to do with how your employers calculate withholdings. This is especially true if you or your spouse had multiple part-time jobs during the same year.
The explanation is pretty simple - your job was incorrectly calculating how much money to withhold from each paycheck because your employer did not know your complete life circumstances. The IRS form W-4 that you filled out when you were first hired - and may not have updated since then - attempts to estimate your tax dues based on the answers to eight questions. Your employer then withholds a pro-rated share of that amount from your paycheck. It is not a perfect science and often individual life circumstances cannot be accounted for in those eight questions. Also, sometimes your family circumstances change and you might forget to update a W-4 to change your withholdings.
Here is an example: Imagine a family that includes a husband, wife, and two children. The husband is an active-duty Soldier with taxable income of $30,000 per year, and the wife was having trouble finding steady employment because they recently PCS'd. To make ends meet, the wife worked a few part-time jobs where she made $3,500 at the first (a seasonal job she worked in November and December), $15,000 at the second, and $18,000 at the third. She accurately recorded on the W-4 that they are a family of four. Let us also assume that where it says "Enter '1' for your spouse" in bold she did not notice that it goes on to say (not in bold) "… you may choose to enter '0' if you … have either a working spouse or more than one job." This is an all-too-common scenario on the W-4 form.
The total income for the year will be $66,500 for this family. This family is in the 15 percent tax bracket, even after deductions and exemptions. But - and here is the problem - with the exception of the $30,000 active-duty income, none of those jobs in isolation earned enough income to be taxed at the 15 percent bracket - and the payroll departments of those companies don't know that the employee has multiple jobs. The seasonal job would not be taxed at all if it was your only source of income and, thus, withheld nothing. The $15,000 and $18,000 paying jobs would each be taxed at the 10 percent bracket in isolation (and most of the income would not be taxed at all if that were the only job the family had all year). These employers would only withhold 10 percent or less of your income because they think that is what you will be taxed.
The end result is that even though each job correctly calculated the taxable withholdings based on your income at that job, it did not account for the total income of your family. The family in the situation above would end up owing several hundred dollars or more in additional taxes at the end of the year.
If this happened to you, or you suspect that this may happen to you when filing your taxes next year, there is an easy fix for this. The service member can change his or her withholdings at the Finance Office, and civilian family members can ask their employer to make changes to their IRS Form W-4. Ask to have fewer exemptions resulting in increased withholdings. And if you end up withholding a little more than you needed to in the tax year, don't worry. Whatever extra money is withheld from your paycheck is given back to you at the end of the next tax year by the IRS.
For free income tax preparation service, the Fort Sill Income Tax Assistance Center is available to active-duty service members, their dependents, and eligible retirees. The tax center is at the Welcome Center, Building 4700 Mow-Way Road on the fourth floor. Hours are Mondays through Friday from 9 a.m. to 4 p.m. and Saturdays from 9 a.m. to 1 p.m.