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I'm a single male with no dependents. I had two W-2s for this year, one of which showed a gross earning of ~$30,000 while the second was for ~$20,000.

When I fed the first one into TurboTax, I got a refund of ~$2600. But then I fed in the second, this only went up by ~$700. Shouldn't the second one be worth approximately 2/3 of the first, rather than almost 1/4?

I have tried speaking with them on the phone and the only explanation I got (from a very unhelpful phone person) was that "as I make more, I am taxed more," as if to say that once the system realized I made about $50,000, it reduced my total refund percentage as opposed to had I only made $30,000. That makes no sense to me whatsoever on this scale....maybe if it had gone from $30k to $5m, but this just doesn't seem right.

Can anyone advise as to whether there might be a good reason, or whether I should pursue this further?

The federal withholding on the $30k was $4600 and the withholding on the $20k was $3900-- NOT a 73% reduction as is $2600 --> $700.

The work was done in the same state for both W-2s...

  • 5
    +1 for discovering the joy of paying taxes out the wazoo like the rest of us ... – dg99 Feb 5 '15 at 2:33
  • What did you put on W4 for each? – littleadv Feb 5 '15 at 5:41
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A way to imagine taxes is as if you were pouring your income into a glass with lines along the side. Up until the first line is free (deduction and exemptions). Everything between that line and the next one is taxed at 10%, then 15% between the next two lines, etc.

When you put in your first W-2, the income filled up the free space and the lower tax rate space, so your tax bill on that income was lower than what was withheld and you got a refund. Your next W-2 stacked income on top of what was already there, so you used up your tax free space and lower tax brackets, and now this income is being taxed at a higher rate. This is the "marginal rate" you typically hear about, where if you are in the 15% tax bracket, you aren't paying 15% of your income in taxes, but instead each new dollar you earn, you pay 15% on. If you look at this second set of income, you can see that you were taxed $3200 ($3900 paid - $700 refund) on $20000 of income. This is ~15% because most of this money sat in the 15% bracket.

To help you see, you can put the second income in first and you will see a huge refund (because it fills the tax free and 10% brackets instead) and less refund from the $30,000.

  • How do I know where the lines are drawn? Somewhere between 30k and 50k things changed PRETTY dramatically... – temporary_user_name Feb 5 '15 at 2:55
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    @Aerovistae Consult the IRS-issued tax rate schedules. Your $30k W-2 was taxed partly at 10% and partly at 15%; the subsequent $20k W-2 was probably taxed partly at 15% and partly at 25%. – senshin Feb 5 '15 at 3:59
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    It's not that things are changing too dramatically in there, it is just that everything between those two lines (see @senshin's post above for the tables) is taxed at 15%. Things below are taxed at lower rates. Also, in addition to the tables posted above, it is important to remember that you have some tax-free, whatever your standard deduction and personal exemption add up to (~10,000), which was used up by the first income you put in – jmg229 Feb 5 '15 at 4:15
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I suspect you provided the same W4 to both the employers, which was calculated assuming you have one salary (I.e.: the standard "Single+2 allowances").

As the result, the withholding from your salary was way lower than it should be because of the marginal rate system explained to you by @jmg229 very nicely.

So assuming I guessed right - here's what happens:

You worked at place A and got $30K. Taxes withheld were $2495.

You worked at place B and got $20K. Taxes withheld were $1240.

Total taxes you paid was $3735.

But alas, the actual tax liability for $50k is $5720. So you end up paying $1985 less than you should have and have taxes due (or less refund) now, when you do your taxes.

When you have more than one employer, your W4 calculations become more complicated and you need to pay attention to what you do. If you end up underpaying more tham $1000 and less than 100% of your tax liability previous year - you may even be liable for penalties.

This is not the case for you right now, since you're talking about reduced refund, but the reason it is reduced is still the same.

  • Assuming you changed from employer A to B in the middle of the year (and don't work two jobs simultaneously), when you started with employer B you should have calculated your W-4 withholding and told them the correct withholding. You can use the IRS Withholding Calculator, or Turbotax's, or whatever you like. – smci Feb 5 '15 at 8:01
  • You should probably make it more clear that your numbers are all made up and not applicable here (Since he had way too much withheld for some reason...) The way I read all but the last paragraph it sounds like you think he's going to have additional taxes due (which he clearly won't). – Joe Feb 5 '15 at 15:37
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This might be easier to see with a picture.

Here is a graph of the tax rates for income up to $500,000, assuming Single, with absolutely no deductions or exemptions other than the basic two (Standard Deduction of $6200, Personal Exemption of $3950, for a total of $10,150 of income taxed at $0).
Taxes paid 0k-500k

That's a bit hard to see your situation in, though, since it's so big, and you're just on the bottom 10% of that graph.

Let's look at a graph that zooms in to just show your situation. This graph shows taxes paid on income from 0k-100k (Again, assuming no deductions or credits beyond the basic two, for a single taxpayer).

Taxes paid 0k-100k

There you see your situation. The first $30k is in blue, the second $20k is in red. The lines go to the Y axis to show taxes paid. The reason you don't pay much tax on the first 30k is simple: you get 10k free (see how tax doesn't go up at all!) and then you get 10k or so at 10%. The last 10k is at 15%. So at 30k you pay around 2500: 0*10k + .10*10k + .15+10k.

The second 20k is now almost entirely at 15% (in fact, the last tiny bit is at 25%!). So you're paying .15*20k or 3k on it (a little more, in fact, due to the last bit).

Of course, if you'd entered in the W2s in the opposite order...

Different case of tax rates 0-100k

Same ultimate end point - around 5800 taxes paid - but it looks like you got a huge refund on your 20k paycheck (around $1k taxes due, $3900 paid, for $2900 refund!) while your 30k paycheck was responsible for the other $4800 taxes due (which is actually more than you paid on it!).

At the end of the day, your issue is that you didn't take your exemptions properly on your W-4. You should've paid a lot less taxes than you did up front. You should increase your exemptions so the correct amount is withheld and you get more of this money earlier in the year.

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You have multiple issues going on:

  • Tax software:
    • it sees the first W2 and sees that you made a, they withheld b, you calculates that you get a refund of c
    • it doesn't care what you put on the w4 or how many weeks you worked for the employer it only knows that last year you made a, they withheld b, and you are owed c.
    • then you add in the second W2
    • Now it says you didn't make a you made (a+x), they withheld (b+y), but your refund depends on where in the tax table you fall.
    • the order you enter doesn't matter.

Try this experiment: replace the numbers from the second w2 with the numbers from the first w2. In other words the two are equal. The refund will not be 2*c. The tax table calculated by the IRS means that the last $ you earn is almost always taxed at a higher rate compared to the first $.

Now why might your situation be even more complex:

  • Two jobs at the same time. The first company used the withholding tables assuming that you made 20K for the entire year. The other used the table assuming that you made 30k for the entire year. Both were withholding at the wrong amount. But normally this would result in under withholding.
  • You switched jobs.
    • if the pay per pay period is the same, and the pay period frequency is the same, they will withhold at the correct rate if given the same numbers on the W-4.
    • But if the second job has a large change in pay (up or down) the new job could be withholding at a rate that may cause the withholding to be way off.

Why does the change of job work this way. The tax tables used by the employer assumes you make the same amount in every pay check. Switch jobs every month: If the pay is the same everything will work out reasonably well. But if the pay rate in the second job is higher: The first job under withheld, and the second job over withheld. The error depends on the number of checks for each job and the size of the pay delta.

To make sure you don't owe a penalty for under withholding always make sure in the year that you change jobs you always have withhold as much federal tax as what you paid the year before. That means you made the safe harbor.

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