Little back story. Last year my husband and I owed $3 on our federal and about $300 combined in state (we live in one state but I work across the border in another so we have to file for both). This year, we made slightly less than last year and made zero changes to our withholding and we owe almost $14K. I figured we would owe but I was totally blind sided by how much it was. I went through the process like 6 times to make sure it wasn't an error and came to the same conclusion every time. After some research it looks like last year we got lucky that my husband's employee withheld 20% on a few one-off pay situations, i.e. bonus, final paycheck (his company was acquired and transitioned to new payroll system of acquired company) and PTO payout. So it seems we just got lucky last year that we had more withheld?
My question is – do we need to start making estimated tax payments, change our withholdings or something else? I believe we'll avoid the underpayment penalty this year since it was the first time we have owed more than $1,000 but I don't want to risk that situation next year.
For some basics, we make about $250K combined, which includes some interest and dividend income. Have 2 dependents and own our home.
large tax bill totally unexpected
byu/Embarrassed-Curve336 intax
Posted by Embarrassed-Curve336
3 Comments
Yes, it sounds like 2024 you all got lucky, that in spite of an error on the w4 forms, enough ended up being withheld. Probably when the new payroll system went in, the w4 setting was incorrect, causing much less to be withheld in 2025. So more money each paycheck, but some of it was supposed to go to the IRS.
So for 2026, yes. The main thing is to correct your w4 forms to be correct for your dual income situation with 2 dependents. Making sure you two are not BOTH claiming any portion of the standard deduction, brackets and credits.
For 2025 you pay what you can, and get on a payment plan for the rest. Since his withholding probably went down compared to previous years, you may have some underpayment penalties.
If your situation next year will be similar to this year, yes, you should plan on either increasing how much tax is withheld or make estimated payments.
(So it seems we just got lucky last year that we had more withheld?)
Yes if you have ruled out entering a number(s) wrong. Just look at the two returns. It’s primarily the type of income (long term capital gains and preferred dividends get a favorable tax treatment) and how much tax is being withheld versus what you owe. I made a spreadsheet so I can do some checks during the year if you like making them or you can use an online tax tool like https://www.dinkytown.net/java/1040-tax-calculator.html. it’s been recommended by an online financial group I follow. I don’t think it does state tax though.
Are you familiar with safe harbors for underpayment of what tax you owe?
When my husband and I got married in late 2023 we ended up owing because whereas I could previously itemize once we were married the itemization didn’t make sense anymore. It wasn’t a huge amount so we rolled with it but then for the 2024 tax year we ended up owing over $4k mainly due to a lack of withholding on dividends, interest, etc. Instead of doing estimated payments. I basically divided what we owed by the number of paychecks in the year and adjusted my withholding. That got us close enough for the 2025 tax year when we ended up with a small refund. For us, it’s easier to just do the extra withholding than try to calculate throughout the year to make estimates payments.