Expecting large NY tax refund and increasing allowances isn’t helping reduce withholding enough - what should I do?

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Aguilar
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Expecting large NY tax refund and increasing allowances isn’t helping reduce withholding enough - what should I do?

Post by Aguilar »

I've calculated my tax withholding for the rest of this year and was hoping someone could validate I've done this correctly. My situation is fairly complex. I was on disability for a while (private insurer benefits and SSDI) and am returning to work full time this week.

Some background info:
  • My disability benefits aren't taxed upfront for federal so I made my first estimated tax payment of $5920 in April and am making the second one in early June.

    I will receive disability benefits in June and will have to repay them to the private insurer and SSA. This will happen cause they keep paying benefits till they review my pay stubs, so repayment is inevitable. The monthly disability benefits should stop by end June.

    I filed married filing separately in 2021, and am going through a divorce which may or may not be signed by the courts in 2022 -- major delays with the courts due to Covid. I always take 0 withholding allowances.

    My 2021 taxes were very different from 2022 -- disability benefits all year vs part disability and part job income this year, plus last year I had a huge claim to right credit for about $36k in disability overpayment from 2020.

    2021 refund was:
    Fed refund $1748
    State refund 3541
MY FEDERAL PROJECTIONS NOW THAT I'M RETURNING TO WORK:
  • INCOME:
    Quarters 1 and 2: private disability benefit totaling $30.5K, SSA disability benefit totaling $15.5K - no tax withholding on either but Q1 and Q2 estimated tax payments will cover that

    Quarters 3 and 4: job income totaling $102K ($126k gross minus 401k max of $20,500, $2k FSA, $1k for disability benefits buy-up, $0 for insurance bc at least for now I'm staying on my spouse's plans); For simplicity's sake, I didn't account for any disability overpayment or my repayment, but for that I'll elect a claim of right credit.

    In addition, I expect $22k in ordinary dividends ($18,500 in qualified dividends taxed at 15%, $3,500 in non-qualified dividends taxed at 24%), $500 in interest income, $500 in foreign tax credit, $700 in net investment income tax
Projected income subject to marginal income tax rate: $152,000 - $12,550 standard deduction = $139,450 income
Qualified dividends subject to 15% tax rate: $18,500 x .15 = $2775 in taxes owed
Fed taxes owed: $27304 marginal income tax + $2775 qualified dividends + $700 net investment income tax - $500 foreign tax credit = $30,279
Taxes withheld: $26,100 ($11,840 estimated tax payments ($5920x2) and $14,300 job paycheck withholding ($894 fed income tax withheld per pay check x 16 checks for rest of year (married filing jointly, zero allowances))

Expected tax liability: $4179

Outcome: There are 16 paychecks left for 2022 at my new job, so elect $262 federal addtl withholding


NY STATE PROJECTION:
  • My projected income is $170,500 (includes qualified and non qualified dividends) - $8K NY standard deduction = $162.5K - $15,440 SSDI income which isn’t taxable by NY = $147,060

    NY taxes owed: $8283 (income tax using NY tax brackets - $500 foreign tax credit)

    Taxes withheld: $14,375 ($875 per month private disability pay x 5 months, an estimated $350 for final private disability check issued at end May, $9650 paycheck withholding for NY and NYC using single zero),

    Expected refund: $6,092
Outcome: How do I reduce the refund closer to $0? I tried changing the number of allowances for NY in a calculator from 0 to 3 and barely changed the refund at all.

Thanks
Aguilar
Last edited by Aguilar on Sat Sep 10, 2022 5:07 pm, edited 4 times in total.
Topic Author
Aguilar
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Re: Formerly on disability, returning to work: How to calculate tax withholding

Post by Aguilar »

Bumping this thread since I need to submit tax withholding soon. I went ahead and ran the calculations as best as I could. Just hoping someone can tell me if it looks like I've done this correctly, or if I'm missing anything.
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FiveK
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Re: Formerly on disability, returning to work: How to calculate tax withholding

Post by FiveK »

It appears you are considering the correct things. A few items:
- How much of your ordinary dividends are qualified vs. non-qualified? There is a lower tax rate on the qualified ones.
- the foreign tax credit won't reduce your taxable income. It reduces your federal tax liability.
- not familiar with NY taxes, but yes you can withhold differently for federal vs. state. If NY is similar to others, the foreign tax credit won't have any impact at all.

You could try tools such as 2022 Estimated Tax Worksheet and/or 2022 Income Tax Calculator to check your numbers. Don't know offhand if they will cover all details of your situation, but they are reasonably complete.
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Re: Formerly on disability, returning to work: How to calculate tax withholding

Post by Aguilar »

FiveK wrote: Wed May 25, 2022 7:29 pm It appears you are considering the correct things. A few items:
- How much of your ordinary dividends are qualified vs. non-qualified? There is a lower tax rate on the qualified ones.
- the foreign tax credit won't reduce your taxable income. It reduces your federal tax liability.
- not familiar with NY taxes, but yes you can withhold differently for federal vs. state. If NY is similar to others, the foreign tax credit won't have any impact at all.

You could try tools such as 2022 Estimated Tax Worksheet and/or 2022 Income Tax Calculator to check your numbers. Don't know offhand if they will cover all details of your situation, but they are reasonably complete.
Thanks for the reply.

I updated the math above applying 15% tax rate to qualified dividends and marginal income tax rate to non qualified. I also fixed how FTC is applied to reduce tax liability, not income.

Open questions:

- Are dividends taxed at the marginal income tax rate by NY regardless of if they are qualified or not? I can't find the answer online.
- My state refund is huge, even if I change the number of allowances. What can I do to offset this? I'd prefer to get closer to $0 so I can invest more from my paychecks.
- I just found out I will be granted $33K in Restricted Stock Units by my new company and it will vest 100% later this year at $21. My employer, a public company, is being bought by private equity. I plan to cash out immediately. I suspect my company will sell off a large portion of shares (25%?) to cover taxes. My question is, do I need to take the stock sale into account in my math and if so, how do I estimate this? The grant specifies a total value $33K, not a number of shares.
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FiveK
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Re: Formerly on disability, returning to work: How to calculate tax withholding

Post by FiveK »

Aguilar wrote: Thu May 26, 2022 7:30 am Open questions:

1) Are dividends taxed at the marginal income tax rate by NY regardless of if they are qualified or not? I can't find the answer online.
2) My state refund is huge, even if I change the number of allowances. What can I do to offset this? I'd prefer to get closer to $0 so I can invest more from my paychecks.
3) I just found out I will be granted $33K in Restricted Stock Units by my new company and it will vest 100% later this year at $21. My employer, a public company, is being bought by private equity. I plan to cash out immediately. I suspect my company will sell off a large portion of shares (25%?) to cover taxes. My question is, do I need to take the stock sale into account in my math and if so, how do I estimate this? The grant specifies a total value $33K, not a number of shares.
1) Most (all?) states tax all dividends as ordinary income, so the likelihood is that NY does so. E.g., most states start with the federal AGI and don't distinguish dividends from other components. Based on a quick look at Form IT-201, Resident Income Tax Return, NY also treats dividends the same as, for example, wages.
2) Is that from using https://www.tax.ny.gov/pdf/current_form ... ill_in.pdf? What tax software are you using to estimate NY taxes?
3) Check the details with your company, but at face value your income will increase by $33K, and the value of the shares withheld by the company for taxes will count as withholding, the same as any other W-2 pay and withholding.
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Aguilar
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Re: Formerly on disability, returning to work: How to calculate tax withholding

Post by Aguilar »

FiveK wrote: Thu May 26, 2022 1:26 pm
Aguilar wrote: Thu May 26, 2022 7:30 am Open questions:

1) Are dividends taxed at the marginal income tax rate by NY regardless of if they are qualified or not? I can't find the answer online.
2) My state refund is huge, even if I change the number of allowances. What can I do to offset this? I'd prefer to get closer to $0 so I can invest more from my paychecks.
3) I just found out I will be granted $33K in Restricted Stock Units by my new company and it will vest 100% later this year at $21. My employer, a public company, is being bought by private equity. I plan to cash out immediately. I suspect my company will sell off a large portion of shares (25%?) to cover taxes. My question is, do I need to take the stock sale into account in my math and if so, how do I estimate this? The grant specifies a total value $33K, not a number of shares.
1) Most (all?) states tax all dividends as ordinary income, so the likelihood is that NY does so. E.g., most states start with the federal AGI and don't distinguish dividends from other components. Based on a quick look at Form IT-201, Resident Income Tax Return, NY also treats dividends the same as, for example, wages.
2) Is that from using https://www.tax.ny.gov/pdf/current_form ... ill_in.pdf? What tax software are you using to estimate NY taxes?
3) Check the details with your company, but at face value your income will increase by $33K, and the value of the shares withheld by the company for taxes will count as withholding, the same as any other W-2 pay and withholding.
Thanks. My current math above in this post treats dividends as ordinary income for NY state purposes.

Regarding #2, I'm estimating fed and NY taxes using this calculator. https://smartasset.com/taxes/new-york-p ... calculator# The only thing that seems strange is there's no way for me to pick Married filing separately which is my filing status now. So I've been using Married. Should I be using Single? If so, I'll need to revise all my math above.

For #3, I'll ask Finance. I doubt they'll be able to say how much of the $33K will be sold off to cover taxes. How do you recommend I approach this for my math? Add $33K to income and estimate $7920 withheld (24% withheld [my marginal tax bracket] x 33K).
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FiveK
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Re: Formerly on disability, returning to work: How to calculate tax withholding

Post by FiveK »

Aguilar wrote: Thu May 26, 2022 2:43 pm Regarding #2, I'm estimating fed and NY taxes using this calculator. https://smartasset.com/taxes/new-york-p ... calculator# The only thing that seems strange is there's no way for me to pick Married filing separately which is my filing status now. So I've been using Married. Should I be using Single? If so, I'll need to revise all my math above.
If you used commercial tax software for your 2021 return, including NY state tax, perhaps the best thing would be a pretend return using your 2022 estimates. The software may even have something like the "what if?" worksheets of TurboTax, TaxAct, etc.

Lacking that, assuming single would be conservative and thus recommended.
For #3, I'll ask Finance. I doubt they'll be able to say how much of the $33K will be sold off to cover taxes. How do you recommend I approach this for my math? Add $33K to income and estimate $7920 withheld (24% withheld [my marginal tax bracket] x 33K).
They should be able to tell you exactly, or at least give you the formula they use and let you fill in $33K to calculate your specific result. For federal supplemental income withholding, 22% is the usual amount. NY would have its usual amount, but I don't know the number.
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Aguilar
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Re: Formerly on disability, returning to work: How to calculate tax withholding

Post by Aguilar »

Finance Dept at my new employer hasn't come back to me about how they're handling covering taxes on the $33K Restricted Stock Unit sale. I think they're still sorting this out for all employees with stock, since the acquisition was just announced and the deal is still in progress.

1. If I assume that they'll sell enough shares upfront to cover taxes, do I need to do anything to my math above, for the purposes of tax withholding?

I want to submit my tax withholding today since it's the due date for the next paycheck, and I figure I can amend my withholding later if I find out the company won't cover all the stock taxes upfront.

2. How do I reduce my NY refund to get closer to $0? I tried changing the number of allowances for NY in a calculator from 0 to 3 and barely changed the refund at all.
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Re: Formerly on disability, returning to work: How to calculate tax withholding

Post by FiveK »

Aguilar wrote: Fri Jun 03, 2022 10:37 am 1. If I assume that they'll sell enough shares upfront to cover taxes, do I need to do anything to my math above, for the purposes of tax withholding?
If you assume they will cover taxes exactly for the marginal tax rate in your situation, then you wouldn't need to adjust any withholding calculated on your other income. The question becomes "how good is that assumption?"
I want to submit my tax withholding today since it's the due date for the next paycheck, and I figure I can amend my withholding later if I find out the company won't cover all the stock taxes upfront.
Yes! It would be nice to minimize the number of W-4s you submit, but it's really not that onerous to submit another if needed.
2. How do I reduce my NY refund to get closer to $0? I tried changing the number of allowances for NY in a calculator from 0 to 3 and barely changed the refund at all.
Try 30?
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Aguilar
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Re: Formerly on disability, returning to work: How to calculate tax withholding

Post by Aguilar »

30 allowances? I don’t think that’s legally possible.

In fact this page says the W4 doesn’t even ask for allowances anymore. https://www.nerdwallet.com/article/taxe ... m-w4-guide

So how do I avoid a massive refund?
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FiveK
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Re: Formerly on disability, returning to work: How to calculate tax withholding

Post by FiveK »

FiveK wrote: Fri Jun 03, 2022 11:33 am
Aguilar wrote: Fri Jun 03, 2022 10:37 am 2. How do I reduce my NY refund to get closer to $0? I tried changing the number of allowances for NY in a calculator from 0 to 3 and barely changed the refund at all.
Try 30?
Aguilar wrote: Fri Jun 03, 2022 12:49 pm 30 allowances? I don’t think that’s legally possible.
In fact this page says the W4 doesn’t even ask for allowances anymore. https://www.nerdwallet.com/article/taxe ... m-w4-guide
So how do I avoid a massive refund?
I took "changing the number of allowances for NY" at face value, assuming that was a reference to https://www.tax.ny.gov/pdf/current_form ... ill_in.pdf and some tool implementing the withholding calculations that would follow from that form. The federal W4 no longer asks for allowances, but NY's form IT-2104 still does.

The IT-2104 instructions include
If you claim more than 14 allowances, your employer must send a copy of your Form IT-2104
to the New York State Tax Department. You may then be asked to verify your allowances.
and
If you will be eligible to claim any credits other than the credits listed in the worksheet, such as an
investment tax credit, you may claim additional allowances.
In other words, if you would get a huge refund with the "normal" number of allowances, you may increase that number to the point at which your withholding is about equal to your tax liability. If you claim 14 or fewer, that's all. If you claim 15 or more, a copy gets sent to NY Tax and they may or may not ask "are you sure - and why?" If your calculations are correct, claiming 15 or more is legal.

What tool are you using for the NY tax and withholding calculations?
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Aguilar
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Re: Formerly on disability, returning to work: How to calculate tax withholding

Post by Aguilar »

FiveK wrote: Fri Jun 03, 2022 1:45 pm
FiveK wrote: Fri Jun 03, 2022 11:33 am
Aguilar wrote: Fri Jun 03, 2022 10:37 am 2. How do I reduce my NY refund to get closer to $0? I tried changing the number of allowances for NY in a calculator from 0 to 3 and barely changed the refund at all.
Try 30?
Aguilar wrote: Fri Jun 03, 2022 12:49 pm 30 allowances? I don’t think that’s legally possible.
In fact this page says the W4 doesn’t even ask for allowances anymore. https://www.nerdwallet.com/article/taxe ... m-w4-guide
So how do I avoid a massive refund?
I took "changing the number of allowances for NY" at face value, assuming that was a reference to https://www.tax.ny.gov/pdf/current_form ... ill_in.pdf and some tool implementing the withholding calculations that would follow from that form. The federal W4 no longer asks for allowances, but NY's form IT-2104 still does.

The IT-2104 instructions include
If you claim more than 14 allowances, your employer must send a copy of your Form IT-2104
to the New York State Tax Department. You may then be asked to verify your allowances.
and
If you will be eligible to claim any credits other than the credits listed in the worksheet, such as an
investment tax credit, you may claim additional allowances.
In other words, if you would get a huge refund with the "normal" number of allowances, you may increase that number to the point at which your withholding is about equal to your tax liability. If you claim 14 or fewer, that's all. If you claim 15 or more, a copy gets sent to NY Tax and they may or may not ask "are you sure - and why?" If your calculations are correct, claiming 15 or more is legal.

What tool are you using for the NY tax and withholding calculations?
Got it, thanks for explaining that. I'm using https://smartasset.com/taxes/new-york-p ... calculator

I changed the State allowances from 1 to 9 and the state taxes only changed by about $20. Does that seem right? This calc doesn't let you input an allowance greater than 9.
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Aguilar
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Re: Formerly on disability, returning to work: How to calculate tax withholding

Post by Aguilar »

FiveK wrote: Fri Jun 03, 2022 1:45 pm
FiveK wrote: Fri Jun 03, 2022 11:33 am
Aguilar wrote: Fri Jun 03, 2022 10:37 am 2. How do I reduce my NY refund to get closer to $0? I tried changing the number of allowances for NY in a calculator from 0 to 3 and barely changed the refund at all.
Try 30?
Aguilar wrote: Fri Jun 03, 2022 12:49 pm 30 allowances? I don’t think that’s legally possible.
In fact this page says the W4 doesn’t even ask for allowances anymore. https://www.nerdwallet.com/article/taxe ... m-w4-guide
So how do I avoid a massive refund?
I took "changing the number of allowances for NY" at face value, assuming that was a reference to https://www.tax.ny.gov/pdf/current_form ... ill_in.pdf and some tool implementing the withholding calculations that would follow from that form. The federal W4 no longer asks for allowances, but NY's form IT-2104 still does.

The IT-2104 instructions include
If you claim more than 14 allowances, your employer must send a copy of your Form IT-2104
to the New York State Tax Department. You may then be asked to verify your allowances.
and
If you will be eligible to claim any credits other than the credits listed in the worksheet, such as an
investment tax credit, you may claim additional allowances.
In other words, if you would get a huge refund with the "normal" number of allowances, you may increase that number to the point at which your withholding is about equal to your tax liability. If you claim 14 or fewer, that's all. If you claim 15 or more, a copy gets sent to NY Tax and they may or may not ask "are you sure - and why?" If your calculations are correct, claiming 15 or more is legal.

What tool are you using for the NY tax and withholding calculations?
Got it, thanks for explaining that. I'm using https://smartasset.com/taxes/new-york-p ... calculator

I changed the State allowances from 1 to 9 and the state taxes only changed by about $20. Does that seem right? This calc doesn't let you input an allowance greater than 9.

I tried this paycheck calc as well and got different results from the smartasset one. Strange. https://www.adp.com/resources/tools/cal ... lator.aspx
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FiveK
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Re: How to calculate tax New York state tax withholding

Post by FiveK »

Aguilar wrote: Sun Jun 05, 2022 3:31 pmGot it, thanks for explaining that. I'm using https://smartasset.com/taxes/new-york-p ... calculator

I changed the State allowances from 1 to 9 and the state taxes only changed by about $20. Does that seem right? This calc doesn't let you input an allowance greater than 9.

I tried this paycheck calc as well and got different results from the smartasset one. Strange. https://www.adp.com/resources/tools/cal ... lator.aspx
Looking at p. 14 of https://www.tax.ny.gov/pdf/publications ... ys_122.pdf, it seems each allowance reduces your taxable income for withholding purposes by only $1000. Thus you would need to claim a large number of allowances indeed to reduce the tax withheld enough to overcome the large amount already withheld this year.

At least, that's how I read it. Perhaps someone more familiar with NY state tax will comment. You might edit the title of your first post in this thread to something like the title of this post to attract such attention.
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Aguilar
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Re: Expecting large NY tax refund and increasing allowances isn’t helping reduce withholding enough - what should I do?

Post by Aguilar »

I posted this thread a while ago and want to revisit it for further help.

Expecting a huge NY tax refund. Elected 9 state allowances to try to reduce withholding but my take home pay didn’t change much.

Is there anything else I can do to reduce my refund? Not a huge fan of giving this interest free loan to the state.
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Re: Expecting large NY tax refund and increasing allowances isn’t helping reduce withholding enough - what should I do?

Post by bsteiner »

For whatever reason, people often have smaller Federal overpayments and larger New York overpayments, or owe money with their Federal return but have New York overpayments. I've often had that.

The simplest thing is to claim the overpayment as a refund on your New York return. New York usually pays refunds more quickly than the IRS.
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Re: Expecting large NY tax refund and increasing allowances isn’t helping reduce withholding enough - what should I do?

Post by grabiner »

Aguilar wrote: Sat Sep 10, 2022 5:10 pm I posted this thread a while ago and want to revisit it for further help.

Expecting a huge NY tax refund. Elected 9 state allowances to try to reduce withholding but my take home pay didn’t change much.

Is there anything else I can do to reduce my refund? Not a huge fan of giving this interest free loan to the state.
You can claim more than 9 allowances. In NY, an allowance is treated as only $1000 of income. If your marginal tax rate is 6.75%, one allowance reduces your annual withholding by $67.50. If you have 26 paychecks per year, this is only $2.59 per paycheck for each allowance.

The state has to be advised if you claim a large number of allowances, but it is a common situation. Many NY residents have large mortgages, pay high property taxes, and donate a lot to charity, so they have high state itemized deductions and need to claim a lot of allowances.
Wiki David Grabiner
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