Underpaid federal tax by $5K in 2014 when claiming 0 with very "standard situation" (married filing jointly). Why?

Question

Assumptions

• If I look at the tax brackets for 2014, if you're a couple filing jointly you have to have an AGI of more than 178,700 to start to see federal tax savings over if you were both not married and filed as individuals.

• When I look at the IRS Publication 15 for 2014, page 43, I see that they the withholding guidelines begin to change earlier than that in terms of taxes withheld at a certain income

So my question is, why isn't the federal withholding the same for single and married couples until you get above the 178,700?

My wife and I claimed 0 allowances on federal last year, have taken standard deduction and exemptions and have no income outside of salary. We are underneath the 178,700 # in AGI as a couple. But we underpaid our federal taxes by over $5K which was a shock, given we claimed zero?

Thank you.

Answer 1

I'll answer based on your response to my comment on the OP.

The basic issue is that when income from multiple jobs is combined, the marginal tax rate may be higher than that for either job separately.

For a single taxpayer with multiple jobs, this is easy to figure out. Suppose you have a job where your AGI puts you at the very top of the 15% bracket, so that if you earn one more dollar there, it will be taxed at the 25% rate, and your employer will know that and withhold accordingly. Now suppose you take a weekend job that will earn you $9000 during the year. Even if you fill out a W-4 with your new employer indicating no exemptions or allowances, they will only withhold at the 10% marginal rate ($900), while you should be paying 25% on that income ($2250). That will leave you with a $1350 tax bill when you file in April.

It's a little more complicated for married couples, but the idea is the same. If you mark that you are married on your W-4, even if you take no allowances or exemptions, the employer will use the "Married" withholding table, which assumes that the income from that job is the entire income for the couple. Since the marginal rate increases more slowly for married couples than for singles (in aggregate, not per person), taxes will be withheld at a rate that is too low. (You may also be subject to the marriage penalty, but that is a correction on the main point.) So, the incorrect withholding comes from the fact that neither employer knows about the other for the purposes of figuring the marginal tax rate (and thus the withholding).

For two-earner households (or multiple-job earners), there is a worksheet at the bottom of Form W-4 that will allow you to compute the additional withholding necessary to avoid an end-of-year tax bill. At minimum, you should mark your W-4s to withhold at the single rate.

Answer 2

The problem is your first assumption seems to be incorrect. (I do not see the $178,700 figure anywhere on the the page you referenced, by the way.) Federal withholding is not the same for singles and married couples up to AGI of $178,700 because their taxes may differ at lower amounts. An example:

Taxpayer A: AGI = $60,000 - Standard deduction of $6200 - personal exemption of $3950 = $49,850 taxable income, for which the tax is $8325.

Taxpayer B: AGI = $40,000 - Standard deduction of $6200 - personal exemption of $3950 = $29,850 taxable income, for which the tax is $4028.

Total tax as 2 singles is $8325 + 4028 = $12,353.

As a married couple: AGI = $100,000 - Standard deduction of $12,400 - personal exemption of $7900 = $79,700 taxable income, for which the tax is $11,644.

{Standard deduction and Personal Exemption amounts from form 1040. Tax amounts from the tax table starting on page 76 of the 1040 instructions.}