Case Study 24: Single Taxpayers with Investment Income Withholding Two Allowances

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Introduction
The purpose of this next series of articles is to explore the changes in the withholding rates with the new 2018 tax bill as well as the incremental benefit of taking an additional withholding allowance. In this example, an individual with qualifying dividends of $5,000 and short term capital gains of $15,000 earning $50,000 a year paid on a biweekly basis electing two withholding allowances.

Calculation
Applicable Withholding

Withholding Calculation

Income Tax Calculation

Discussion
As shown above, the withholding rates for 2018 result in a smaller amount being withheld from each paycheck. The taxpayer will receive an increase on each individual paycheck of $52 ($1,340 annually). Additionally, they will end up paying $449 less on their income tax return.

Note that while the taxpayer had sufficient withholding when they did not have investment income, the addition results in the taxpayer having a significant tax payment at the end of the year without estimated payments.

Disclaimer
Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.